Cash beats conscience

June 19, 1998

Some findings of the ESRC's economic beliefs and behaviours project

Investors with a conscience make only "token" investments in ethical funds, and put financial gain ahead of their scruples, according to a dual-disciplinary research project for the Economic and Social Research Council.

The joint project from Bath and Exeter universities, mixing economics with psychology, has gleaned an insight into the ethical investor. The research, for the ESRC's almost complete economic beliefs and behaviour project, found that most ethical investors will not make many financial sacrifices to "appease their consciences".

The team found that most ethical investors also had non-ethical investments. The investors tended to ring-fence a small percentage of their investment cash which they would treat ethically. Adrian Winnett, an economist at Bath, said: "Most were prepared to do only so much to appease their consciences. They were not prepared to put all their eggs in one basket. It is a bit like those who make a small, annual contribution to charity to support a good cause."

The researchers focused on unit trusts that promoted themselves as ethical or green, avoiding investment in companies involved in making arms, alcohol or tobacco products or firms with practices that damage the environment.

"Ethical unit trusts still make up only about 1 per cent of the total unit trust market," Dr Winnett said. "But they are growing very, very fast. We wanted to find out what kind of people were investing and if people would invest if it meant accepting a lower return."

Some investors who ring-fenced ethical investments and invested elsewhere often expected the returns to be low. Dr Winnett said: "Some thought that if they were getting too high a return their funds must not be truly ethical."

Others invested largely because of religious beliefs or a desire to try to change business culture and did not expect high returns.

But most "ethical" investors were not prepared to sacrifice good returns for a clear conscience. Dr Winnett explained: "Most felt that if their returns were really badly threatened, they would have serious doubts about the fund. But, in reality, that has not happened yet."

The findings are based on hypothesis, as ethical trusts on the whole perform as well as funds with no qualms about where they invest. "It is not a case of the more scrupulous the fund, the worse the returns," Dr Winnett said. "We found no clear relationship."

An ethical unit trust's performance usually depends on how well the smaller firms do on the stock exchange, as most ethical investments avoid the major blue-chip companies, Dr Winnett said. "Ethical funds have not done too well recently, but there are times when they outperform the others."

Dr Winnett said that there was little evidence that unit trusts were wrongly claiming to be ethical, but cutting corners to secure the best returns, or that they were making claims as "a ploy to tap into new markets".

The research team found variations in what unit trusts deem to be ethical, "but some of them are very strict about their screening procedures", Dr Winnett said. All of the firms are monitored by the Ethical Investment Research Information Service, which provides an independent check on the funds.

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