Introducing SRI Styles: combining issues and approaches

SRI funds cover a diverse range of ethical issues (concerns/interests) and approaches (investment/divestment strategies).  These are combined in many different ways by different investments managers.  sriServices has developed a system which groups funds into ‘styles‘, or segments, based on their dominant ethical, social and environmental features.  Or system takes into account common areas of concern and groups funds in a way that helps advisers and investors to better understand this area.

Eight ‘styles‘ have been identified by SRI Services.  Although they are used by a number of others these are own classifications, based on our research and experience.  They are intended to help people to recognise broadly ‘ethically similar’ options and to help steer people towards options that meet their personal ethical/SRI aims and opinions.

There are no clear boundaries however – and there is cross-over between some of the styles.  Some funds can fit into more than one style. This is a useful reflection of how diverse and dynamic this area is.

See our ‘SRI Styles Directory’ here.

What do we mean by ‘SRI Styles’?

The names of the styles refers to funds’ SRI, green and ethical issues and approaches – not financial sectors or investment strategies.

This site does not cover conventional financial investment features (eg fund performance) as this is readily available from a range of other sources.

The term  ‘SRI’ (and ‘Eco’ – as in ‘Fund EcoMarket’) is used loosely to denote consideration of the entire universe of fund options that consider environmental, social, ethical, responsible and other related investment strategies – irrespective of investment type, fund manager motivations or target investors.

sriServices and Fund Eco Market currently focuses on onshore, regulated,  retail SRI options.  All such funds are listed on our database in order to ensure that investors and advisers have access to the whole SRI market.  Additional funds or investment options are occasionally added at our discretion (eg Offshore or FCA recognised) – where we feel they add a useful extra dimension – but funds are only removed once closed.

Where it all began:  Ethical funds

The origin of the UK SRI movement is in actively managed, retail, ethically screened funds. These funds include or exclude companies on the basis of what they do or how they operate. The first UK ethical funds – the Stewardship range –  were launched in 1984.  This market has evolved and diversified significantly since that time.

Ethical Investment Styles

To aid the advice process it is best to think of ethical funds as falling into two groups:

‘Negative Ethical Funds’. Funds where negative screens are dominant, absolute and clear. These funds are likely to have a range of negative and/or positive ethical screening criteria but  the negative screens are most clearly apparent in terms of where fund  invests. These funds have been called ‘Traditional Ethical’ as the focus of these funds is traditional ethical issues.

‘Ethically Balanced Funds’. Funds which have extensive ethical screening criteria and have criteria which balance the positive aspects of what companies do against activities that are regarded as negative.  This can require weighing up the ethical ‘pros and cons’ of particular issues as well as companies.  Fund managers therefore frequently have to balance issues and make pragmatic decisions when deciding whether or not invest.

Both approaches are likely to cover a wide range of ethical, social and environmental issues, often in great detail – but ‘Traditional Ethical Funds’ are more likely to have clearly defined and detailed exclusions whereas ‘Balanced Ethical Funds’ are likely to be more nuanced or positively oriented. Investors who are looking to specifically avoid certain areas may be best suited by Tranditional Ethical funds whereas investors who are looking for broadly ‘ethical’ companies may prefer ‘Balanced Ethical’ options.

Faith Based investment

Most SRI funds can be regarded as reflecting a set of views or opinions, there is however a small number of funds known as ‘Faith Based’ funds with very specific policies designed to appeal to different religious groups. These funds tend to adhere to specific policies often set out by a panel of experts in a particular faith. The best known funds in this field are Islamic funds – which invest in line expert interpretations of Shariah principles.

Environmental and Sustainability focused ‘themed’ options

Over the years a number of themes have become increasingly popular and this has given rise to ‘themed’ or ‘thematic’ SRI options.

The major trend has been the increase in interest in environmental (‘green’) issues, both as part of a wider ethical strategy and as a standalone SRI style.

The first UK environmental fund for individual investors was launched in 1988 – the Jupiter Ecology fund.   When it comes to selecting where to invest the fund policy dictates that they will chose only companies that are offering environmental solutions or have market leading environmental practices.  The fund also has a number of strict ethical avoidance criteria.

Today there are a number of  Environmentally themed  funds available.  All consider environmental issues in great detail when deciding where to invest.  Some consider ethical and  social  issues others do not.   A small number focus on a single environmental single issue or niche (eg climate change)  or a specific resource (eg water).  Some invest significantly in cleaner technologies and environment solutions companies – others invest across all sectors selecting only companies with strong environmental policies and practices.

A further variation, that in many cases includes elements of both environmental and ethical funds, is Sustainability  themed funds.    Managers of Sustainability themed funds typically seek out positive, forward looking companies with sound ‘sustainability’ related practices.

The companies these funds invest  in can typically be expected to have strong environmental practices (eg relating to climate change, resource management, pollution, transport or energy)  as well as sound  social policies (eg relating to employment practices, health, education and human rights).  Because of their emphasis on companies with market leading practices they are typically unlikely to offend investors with more traditional ethical concerns as (similarly to Environmental funds),  commonly avoided companies are unlikely to meet the funds positive stock selection criteria.

This style is  increasingly popular as fund managers and investors recognise the growing importance of the sustainability agenda to business and therefore investment returns.  These funds often consider a wide range of issues often including ‘ethical criteria’.

Encouraging companies to be more responsible

From the earliest days of ethical investment investors have looked for ways to positively influence companies whilst achieving decent investment returns. From the start,  funds used two main strategies; influencing ‘supply and demand’ for shares (through screening or thematic investment) and dialogue with perhaps a little shareholder activism (engagement).

Encouraging change:

Investors who are keen to influence companies and support positive change can invest in funds where fund managers use their position as asset owners to influence companies through dialogue, voting and/or  ‘responsible ownership and engagement’.

Today there are many fund options that are covered by asset specific responsible engagement strategies (eg all of a particular fund manager’s Equity assets or all of their UK Bond holdings) .

Although such strategies can apply to ethically screened and themed funds  –  most  of the assets covered by such strategies are regular unscreened investment options.

Clients and financial advisers are typically not made aware of the  ‘engagement’ , ‘voting’, or ‘shareholder stewardship’ strategies of fund management groups.

Strategies vary  between investment providers – either a result of resource differences or other strategic decisions.  There are however common engagement features.  These exist irrespective of whether engagement work is carried out in house or subcontracted.  A major feature of all engagement strategies is to encourage companies to pay attention to long term issues such a environmental constraints, social issues and governance structures.

All managers of such strategies operate on the basis that activity of this kind must aim to enhance (often mid to longer term) business success and be in the best interest of investors.

 

Need more information on SRI Styles?

 

 


This information is for use by UK professional financial advisers only. SRI Services is not authorised to give investment advice, if you are an individual investor you can find an IFA on www.unbiased.co.uk. The information on this site does not in any way constitute advice or recommendation. The information and tools are intended to compliment, not replace existing adviser information sources. Investment decisions should not be based on the information contained on this site alone. Please confirm fund information with fund managers. We cannot be held in responsible for advice given as a result of using this site and are not responsible for the content of sites linked to this service, we do however of course take every effort to ensure the content of this site is as accurate as possible at time of publication.