PETER LANG

OVER A BILLION pounds is now invested in the UK by individuals with ethical considerations in mind. In addition some £60 billion of local authority money is similarly invested.

This is still a comparatively tiny sum. But its significance is less its size than its rate of expansion: ethical investment is the fastest growing area of the personal finance market. Over 60% of people in the UK say they would prefer to invest ethically. In the USA some $670 billion is invested "ethically" - a powerful 9% of the stock market.

But is this money helping the truly ethical businesses with their need for capital? Most economists recognize that access to capital is crucial for businesses, so if we are going to move our companies towards social and environmental responsibility, then channeling money to environmentally sound businesses is vital.

A closer examination of the sums above reveals a disappointing picture. Nearly all the investment is in funds run by city institutions used to buy the shares of large corporations listed on the stock market. Only a tiny sum, probably less than £50 million, has found its' way to socially responsible funds such as Triodos Bank, the Ecology Building Society, Radical Routes and Traidcraft. Indeed an entrepreneur wanting to start up a business where ethics and the environment are to be paramount is likely to find it just as difficult raising finance today as it was a decade ago when ethical investment was almost unknown. What has gone wrong?

MOST ETHICAL investment is in the hands of city institutions. Their main advertising line has been that you don't lose out when you invest ethically. They compare the performance of their unit trust with non-ethical funds which give average returns of 8-15%. The ethical funds do indeed give returns in this band, and they do so by not buying shares in the worst companies like RTZ, British Aerospace and ICI.

But there is a flaw here. Many companies (and especially the large ones) only make their profits by exploiting the planet and its people. They do this by "externalizing" many of their costs: making the community, future generations or the environment pay for the effects of their pollution and resource use. If CFC manufacturers had to pay the costs of the effects of the ozone hole, their profits would become instant liabilities. If motor manufacturers and oil refiners had to meet the cost of climate change, they would find their businesses making extensive losses - and so would the institutions owning their shares. So, how ethical is it to keep investing in such ecologically unsustainable businesses?

Yet, so-called ethical investors are still putting their money into large companies without any real idea of how they will perform as the environmental costs stack up. The ethical funds themselves are in a difficult position since they are aware that if one of them breaks ranks and starts selling large swathes of shares in unsustainable companies, their huge size could make those shares tumble. If several funds began selling shares, that could precipitate a stock-market collapse. Their only option is to use their clout to persuade companies to change their operations to take on the environmental agenda, but fund managers as a breed have shown little enthusiasm for this.

Investors themselves need to accept that they can only expect high financial returns from companies which exploit the planet, and they should instead seek out the real ethical investments in the environmentally and socially responsible economy.

This will inevitably mean learning more about how money works, but there are surprises to be found in this emerging sector of the new economy. Radical Routes, for example, which lends to co-ops, has never had a defaulter. Triodos Bank lists publicly the recipients of many of its loans, and the list reads like a Who's Who of projects benefiting people and the environment. Moves are now afoot in the UK to copy the Grameen Bank in Bangladesh, which lends only to the very poor who have no security to offer: this bank is now the largest in Bangladesh.

There is a small risk to investing outside the stock exchange. But for the well-being of people and the planet this risk is worth taking. In the long run not investing truly ethically carries a greater risk and that risk is to the whole planet. The ethical funds and investors need to look hard and ask themselves - how ethical is their ethical investment?

Peter Lang is the author of Ethical Investment - A Saver's Guide, available at £10 from John Carpenter Publishing, The Spendlove Centre, Charlbury, Oxon 0X7 3PQ.

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