Sunday, February 11, 2007

Last week a British ethical investment fund outperformed "the market" for the first time. And easily.

The Co-operative Bank is a UK ethical banking stalwart. They're customer owned - like PSIS. One of their funds has taken top spot in the UK All Companies sector - outperforming the sector and also the FTSE by more than 100%, and clocking a three year return of 88.6%.

Not surprisingly, here in New Zealand our ethical investment market is a lot less mature.

In fact the NZ Government was pounced on by the Greens last week for investing Super Fund cash in nuclear and cluster bomb weaponry manufacturers. It's reminiscent of the LA Times Gates Foundation expose last month highlighting their investment in companies directly linked to the causes of health problems they sought to alleviate. The publicity prompted a Gates Foundation review. Our Government is to do the same.

The real problem is that the economic basis itself is fundamentally flawed. Over on FrogBlog last week the old "perpetual growth" conundrum was aired again. "Business as usual" is founded on resource use that seeks to contribute constant growth in order to pay constant investment dividends. Constant growth based on a finite resource base is bound to turn pear shaped.

We're seeing the start of the crunch now with climate change and peak oil. Technology can only help us along so far. At some point we've got to change the way we "do business". The term decoupling is sometimes used in the context of economic growth and it's relationship with GHG emissions.

FrogBlog uses demand for energy as an illustrative example:
"...if NZ electricity demand were to grow at 3.5% per annum we would need to double our generating capacity every 20 years. This would be a major challenge."

Maybe we need a decoupled investment fund. The Co-op bank in UK and Prometheus here in NZ are more "decoupled" than the typical investment offering. And of course if ethical investment products pull in business that would otherwise go to standard funds we're moving in the right direction (remember the Aquaflow offering).

As more of the environmental and social costs of "business as usual" are internalised, ethical investments can expect to outperform the market as a matter of course. As cleaner business becomes the norm the concept of a diversified portfolio will start to make financial and ecological sense.

Update: in another move toward a pigovian tax environment, the NZ Greens have proposed that companay tax shifting occurs in order to incentivise cleaner production.

Another update: there're some quality comments in this subsequent Frogblog post - including from a fund manager.

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