How to become an ethical investor (2024)

The amount of money invested in a "sustainable and responsible" manner in the UK has swelled to an estimated £275bn, a report has found. The study from Eurosif, the Brussels-based European Sustainable Investment Forum, claims that an exciting new phase in the development of ethical investment is now taking place in the UK. To mark National Ethical Investment Week, which starts on 14 October, Guardian Money looks at the latest themes on green finance and explains how you can join the ethical revolution.

Rail: The right track for green investors

It says a lot about the changing nature of environmental investing that the latest theme in some portfolios is the glamour stock of the Victorian era – railway companies. Amid rising petrol prices and congested roads, many rail firms, particularly in the US, have enjoyed a renaissance, supported by environmental investors keen to see polluting trucks taken off the highways.

In the 1970s and early 1980s many American railroad companies were on the verge of bankruptcy, having lost their passenger business to the car, and much of their freight as well. But they fought back with huge increases in fuel efficiency – America's railroads are three times more fuel efficient than sending freight by truck – and improved service reliability. Around 40% of freight in car-loving America is now carried by rail, a much higher figure than in Europe, while President Obama has agreed huge new federal investment in high-speed passenger lines.

Shares in railroad companies have soared. Union Pacific, which dates back to 1862 and dominates west of Chicago, was trading at $30-$35 in 2004 but shares now change hands at more than $120. In 2009, legendary investor Warren Buffett bought America's second biggest rail operator, Burlington Northern Santa Fe, in a deal valuing the company at $44bn, while CSX, the third biggest operator, has seen its share price quadruple since 2004.

Truck companies that work with the railroads rather than compete with them, have also benefited. JB Hunt, one of the biggest road hauliers in the US, partners with railroad firms to cut carbon emissions. As an example, it says, it can truck a shipment from a Procter & Gamble plant in Delaware on the east coast to a rail freight terminal in Pennsylvania, then transport it by train to Chicago, where it is switched to another train to California, and for the last 100 miles by road truck – again to a Walmart store. So a 3,000 mile shipment travels just 150 miles by road.

It tells customers: "We can help you convert more of your over-the-road shipments to rail, saving you money and reducing greenhouse emissions by 50%." It's a win-win for customers, investors and the environment. JB Hunt's share price has jumped from $6 at the start of 2003 to $55 this week.

Train companies form a key part of Jupiter Ecology's £340m portfolio, managed by Charlie Thomas. "When investing in environmental solutions companies, rail businesses tick many important boxes," he says. "They score well in terms of pollution abatement and efficient use of natural resources, while also responding favourably to the demographic challenges caused by a rising population (eg improving local air quality and reducing congestion)."

He has invested in Kansas City Southern, as well as Hub Group, which, like JB Hunt, is an "intermodal" company maximising efficiency between road and rail. But it's not just a US story. Jupiter Ecology counts East Japan Railway among his top 10 holdings.

Water: the big new wave

Ten litres of water is used to produce just one single sheet of A4 paper. Around 850 litres of water is needed to irrigate, grow and process the oranges squeezed to produce one litre of juice. And if you buy steak mince this weekend, consider this: it will have taken 7,750 litres of water to produce a half-kilo pack that's enough to make a few burgers.

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It's little wonder that environmentalists are deeply concerned about "water stress". Asia's industrial revolution is driving a vast increase in water demand – and the supply is running out. The United Nations reckons that if things stay as they are, by 2030 demand will exceed supply by 40%, leaving up to four billion people suffering acute shortages.

Only 2.5% of the world's water is fresh, and two-thirds of it is in fast-melting polar ice and snow cover. China is particularly at risk as industrial expansion continues at a breakneck pace. The country has 21% of the world's population but only 7% of its available water. When countries industrialise, they use far more water. In the developed world, industry uses 42% of the water supply; in the developing world, 81% is used by agriculture. But as countries build power stations, steel plants and paper mills, their water consumption rockets.

So how are ethical investors responding? Sue Round is head of investment at Ecclesiastical Insurance, which runs the Amity range of green and ethical funds. Her starting point is encouraging water-intensive companies to disclose how much water they and their suppliers are using, through what's called the Carbon Disclosure Water Project. The project aims to put "water stewardship" at the heart of every company's business strategy.

But is it having real impact? Round insists big companies are taking it seriously, citing Tesco as an example. It has worked with suppliers and factories to cut water usage by 300m litres a year. But while that's undoubtedly good for the environment, how does it help investors? Round points to Marks & Spencer. "It has made considerable water savings in recent years. All their environmental efficiencies have added significantly to their bottom line."

The Amity International fund also invests in companies that are engineering solutions to the coming water crisis, such as recycling industrial and residential waste water. It holds shares in Boustead, a Singapore firm specialising in waste water engineering and whose products are in 800 water plants across the globe. "Its treatment systems can safely return waste water to drinking water quality," says Round. Its share price is currently nearly $1, double the level of three years ago but still below the peak before the financial crisis.

Ecclesiastical is also investing in desalination as a potential solution to water stress. It is estimated there are currently 543 ongoing desalination projects across 90 countries, each costing between $100m-$300m. Saudi Arabia and Qatar are the biggest investors, but there are major projects in the US and China. Even Thames Water has spent £250m on a desalination plant in Beckton, east London, which can supply drinking water for one million Londoners, and Southern Water is considering one on the south coast.

"Advances in technology have turned a proven but essentially uneconomic activity (boiling seawater to produce distilled vapour) into one increasingly attractive as a solution to water scarcity via membrane osmosis," concluded Ecclesiastical in a research note earlier this year. It believes desalination will be a significant investment play for ethical investors, naming GE, Suez and Siemens as potential stock beneficiaries.

And most green funds now have a portion of their portfolio dedicated to water stocks, while others, such as Pictet Water, invest only in water.

Agriculture: solutions, not speculation

Big agriculture and the ethical and green investment community rarely see eye to eye. Two years ago a Swiss investment research firm named agricultural firm Monsanto as the world's least ethical company. Many ethical investors also despise the billions pouring into food exchange-traded funds (ETFs), where speculators are cashing in on constricted supply and rising food prices.

But one British agricultural firm is catching the attention of green investors worldwide. Genus, based in Basingstoke, is the former breeding division of the Milk Marketing Board and is regarded as the world leader in improving pig and cow herds. "Basically it is seen as agreen and ethical stock because it has developed techniques to reduce the amount of feed and water required to get meat on to people's tables," says Mark Hoskin of ethical financial advisers Holden & Partners. Shares in Genus, now one of the 250 biggest stock market-quoted companies in Britain, have tripled since 2009 from 475p to 1474p this week. It is currently a top holding in Ecclesiastical's Amity fund.

Other green and ethical fund managers focus on food quality. Triodos, the ethical bank, which is shortly to launch a sustainable equity fund, says food companies will make up around 12% of the portfolio. Cheviot Climate Assets, arelatively new environmental fund, has 13.4% of its fund in food, specialising in grain production and harvesting, food testing and food processing.

The staple food stock, so to speak, of most green funds is Whole Foods Market, the USorganic supermarket chain with an outpost in London's Kensington. It has earned a Waitrose-style reputation in the US, where its combination of high quality and high prices have prompted wags to label it "Whole Pay Check". But its share price has hit $100 in recent trading, compared with just $10 in early 2009, and significantly above its 2006 peak of $77. Jupiter Ecology's largest holding is United Natural Foods, the biggest independent distributor of organic foods in North America. Despite the financial crisis, the squeeze on household budgets and rising unemployment, United Natural Foods' share price has increased from $25 to $60 over five years. When the credit crunch first struck, analysts reckoned that households would cut back on costly organic produce but it seems the opposite is true, in North America at least.

"The sector has grown by 10%-15% ayear for the last 10 years but even after that it still only accounts for 4% of all grocery sales in America," says Charlie Thomas of Jupiter Ecology. "However, the number of people putting an organic product in their supermarket basket has gone from 20% to 80% of households."

Organic food suppliers and retailers may meet western levels for sustainable agriculture but John Ditchfield of ethical advisers Barchester Green acknowledges they do little to alleviate hunger in poorer countries. However, he points to WHEB Asset Management, a specialist fund manager focusing on challenges to the world economy, such as rising food prices and scarce water supply. It sees technology as part of the solution and is an investor in Trimble Navigation Systems, a GPS firm that tracks climate patterns to help farmers produce food more efficiently.

Co-operatives: think small, think local

Many green investors are more than happy for their money to go into companies based overseas – US railroad operators, Asian water treatment firms and so on. But what if you want to invest in projects on your doorstep?

The good news is that across the country there are growing numbers of schemes enabling people to give financial backing to local projects, and hopefully earn a decent return, too.

During the last couple of years, Guardian Money has featured several, from cafes and renewable energy projects, to pubs and post offices.

These community-owned and run businesses are becoming increasingly common, and often there is an opportunity for locals – and others sympathetic to the cause – to invest by buying shares or "loan stock" (ie you lend a sum of money for a set period).

Since 2009, around 15,000 people have invested in more than 100 community share issues, raising more than £15m, according to the government. But this looks like an underestimate.

Only last week, communities minister Don Foster launched a "Community Shares Unit" to help local people become part-owners of much-loved assets and services such as their community pub or football club. Backed by the Department for Communities and Local Government, and run by Co-operatives UK and Locality, the unit aims to help more local enterprises use share offers to get projects up and running.

There is clearly an appetite for such schemes: earlier this year, a share offer for a community solar power station called Westmill on the Oxfordshire/Wiltshire border raised more than £4m in just six weeks.

With these schemes there is usually a minimum investment, which is sometimes as low as £10-£50 but, more typically, £200-£250. The projected investment returns can vary, though 4%-6% a year is not uncommon.

There does not appear to be a "one-stop-shop" website that rounds up all the community projects across the country that are looking for investors. However, both the Community Shares Unit and the Community Shares Fund feature details of current and past share offers.

Guardian Money will continue to highlight some of the more interesting schemes that come to our attention. For example, ethical investors in Great Britain are being encouraged to look across the Irish Sea and invest in Northern Ireland's first community-owned wind energy co-operative.

Drumlin Wind Energy Co-operative has plans to operate five 250kW turbines north of Belfast, and has already raised £1.6m, which will fund the first two. Individuals, businesses and organisations can invest between £250 and £20,000; it believes it can offer an average annual return of 7% to 10% over 20 years. The share offer is open until 30 November.

Another site worth checking is Abundance, which describes itself as a "community finance platform" allowing people to put money into UK renewable energy schemes and receive a regular cash return based on the energy produced. It currently has two projects open: a wind turbine in the Forest of Dean, and a scheme to install solar panels on homes in the South Downs.