Are you an ethical investor?
I ask this because this week is National Ethical Investment Week.
African Diamonds jumps 8.9% after De Beers pull-out
- Shares in the Irish diamond miner African Diamonds rise 8.9% as news emerges that De Beers is to sell its entire 71% stake in the joint AK6 Botswana diamond project.
- The company will now be able to move forward with construction on the site. Mining operations are expected to begin in early 2012.
- Shares in African Diamonds have soared by 137% from a July low of 21.5p
And if the conference I attended last week is anything to go by, ethical investing could do with a kick-start.
I read a survey recently that said two-thirds of us believe ourselves to be ‘green’ and ‘ethical’. And almost a half would like the money we invest to make a positive difference in this respect.
But in the final reckoning, the survey said, most investors will only make green and ethical investments if they make good money as well.
Have they made money? So far the evidence would suggest not.
Although ethical investing covers a multitude of concepts, one of the more popular is alternative energy. But since the height of enthusiasm for this bold new investment concept, the Eco-Index of clean energy stocks has fallen by some 70%.
One fund manager to take advantage of this tide of conscience was Guinness Asset Management, which launched its Alternative Energy Fund two years ago.
As manager Edward Guinness put it: “I can safely say that late 2007 was not the best time to launch… however, investors now have an excellent opportunity to enter the sector at a time when we believe high future returns are achievable.”
Well, he would say that.
But still, investors should be interested in any sector of the stock market where shares are available at less than one-third of the price paid in recent history. Especially if, as Edward Guinness argues, “the medium and long-term drivers - firm energy prices and government support to address climate change and energy prices security - are stronger than ever”.
The fall from grace of alternative energy stocks is easy to explain and is an object lesson to anybody tempted to follow stock market fashion.
A new awareness of climate change, coupled with the energy crisis, led many to think they should be investing in companies that could in some way solve these problems.
Whether out of a desire to be a good citizen or driven by the profit motive, investors were keen to put their cash into this area.
Never slow to spot an opportunity, fund managers created the necessary funds. In a short space of time, a lot of money was plunged into the relatively few shares that met the required criteria.
Share prices were inevitably driven too high. To make matters worse, the credit crunch deprived many innovative but loss-making companies of the finance that they desperately needed.
Now though the dust has settled. Valuations have descended from the stratosphere and the many companies striving to do something about the various threats to our way of life can get on with business.
But should investors get involved?
Why ethical investment is a vexed issue
There is a fair amount of muddled thinking in this area.
For a start, we should dispel the concept that those “medium and long-term drivers” referred to by Mr Guinness will necessarily translate into companies that deliver high returns to investors.
The picture so far is rather the opposite.
There is a huge number of companies working on ways to tackle the world’s environmental and energy supply problems. But in industries such as fuel cells or electric vehicles, profits are nowhere in sight. This obviously is a no-go area from an investor point of view.
What about other sectors?
Short of companies that sell armaments to the third world, all others feel under pressure from customers and investors to acknowledge the eco-awareness zeitgeist and are doing something about it.
Consider big supermarkets? They could be accused of defacing the visual environment, putting the small shopkeeper out of a job, and causing us all to have to jump into the car each time we want a packet of butter. But they are at the forefront of many environmental initiatives in areas such as packaging and electricity consumption. They also make a lot of money.
Does this qualify them as good ‘ethical’ investments?
Concepts such as ‘ethical investing’, ‘alternative fuel’, ‘energy security’, ‘cleantech’ and ‘sustainability’ are bandied around as if they are more or less the same thing.
But whatever guise it comes in, ethical investing increasingly looks like one of those passing investment fads.
In the end, businesses respond to their customers. This is where the pressure for change comes from.
Small companies are emerging all the time to respond to these demands. From the investment perspective, some will deliver returns quickly, others may never do so.
To my mind, the waste to energy industry, populated by companies such as TEG Group (ticker: TEG), offers the prospect of near-term profits.
A second area that is already flourishing is energy saving, which on the stock market features the likes of Cinpart (ticker: CNP), BGlobal (ticker: BGBL) and Sabien Technology (ticker: SNT).
These are companies that are, or very soon will be, making good money. Too many other worthy corporate citizens beloved of the environmental watchdogs are far from doing so.
Good investing,
Tom Bulford
For The Penny Sleuth
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