Adviser Focus: Jeremy Newbegin, The Ethical Partnership

"Making the step from visiting the bottle bank to investing in ethical funds is a big one...”

While it was his faith that saw Jeremy Newbegin, director of The Ethical Partnership, focus on ethical investment, he is under no illusion that investor pragmatism will play a large part in the growth of the ethical and environmental investment market.

Take the example of Keith Clarke, chief executive of WS Atkins, Britain’s biggest engineering and design consultancy. Clarke is well known for his views on reducing both the company’s and his own impact on the environment, believing a low carbon world is essential for the human race’s survival. Yet in a recent report in The Times, Clarke admitted there were restrictions on how far he could take his commitment and a degree of compromise was necessary – air travel to meetings worldwide being his case in point.

It is a view with which Newbegin can empathise. Like Clarke he drives a hybrid car (but admits to also owning a Honda S2000), but recently he had to attend an Ethical Investment Association conference in Edinburgh, which he says, “posed a real problem”.

“I try to be environmentally conscious wherever possible. And I struggled with what would be the best way to get there. I could have caught the train but that would have entailed a long journey, an overnight stay and the loss of a day in the office. In the end I flew from Southampton airport – I left at 8am, attended the conference and networked with other like-minded IFAs and was back home by 10pm. It saved time and it saved money – the total fare was £70; I could not have travelled by train to Edinburgh for £70.”

“I have been focused on ethical investing since 1996 as a result of my beliefs and yet I see the need to be pragmatic at times,” he says.

It is that pragmatism, he feels, that will see people who have not traditionally invested for ethical or environmental reasons take the step towards doing so.

“People are being educated and are becoming more and more aware of matters such as climate change, the environment and other ethical issues. I believe there are a growing number of people out there who are not ‘dark green’ environmentalists but who, nevertheless, want to do their bit for the environment and will be inclined towards funds that invest responsibly.”

Events such as the United Nations Climate Change conferences are increasingly bringing
environmental issues to the attention of the investing public. Hardly a week has gone by in 2010 without the Financial Times running a section on environmental and ethical business and investment. There is also a growing political and regulatory will at national level, perhaps where it matters most, to pursue and develop ‘green’ strategies.

Newbegin admits: “Making the step from taking their bottles to the bottle bank and putting their money into an ethical fund – is a big one, but for the individual, making that step from showing an interest to actively investing –  is not  insurmountable”.

Co-operative

The Ethical Partnership was established in 1998, when three advisers left the firm they were working for – Ethical Financial Ltd – and set up on their own. They did so as a co-operative and in accordance with what they believed. There are now four advisers, trading under The Ethical Partnership name: Newbegin, based in Hampshire; Michael Marsden, also in Hampshire; Simon Kirkup, in Yorkshire; and Gregory Braithwaite, based in Kent.

Working as a co-operative, says Newbegin, gives the four advisers a focus, provides input on key issues and the ability to bounce things off one another, and economies of scale. But it also allows each to work autonomously and that freedom appeals.

Having initially joined a network, The Ethical Partnership went down the directly authorised route in 2001. They contract out compliance support, which is currently provided by Bankhall, now owned by Sesame.

Clients who come to the firm, are encouraged as part of the fact find, to complete an ethical preferences questionnaire to ascertain what is their lifestyle and beliefs. That information is used to help identify the range of funds that will best suit their ethical views.

For those who are unsure of the difference between ethical and socially responsible investing, and how fund managers are actively making a difference on these grounds through the use of investments, The Ethical Partnership website has explanations and information. It also carries a performance table of ethical funds, which will give investors the best performing funds over 12, 36 and 60 months, including yield. The table is updated once a month.

It is the performance of ethical and environmentally focused investments, and the ability to make decent returns for investors, that will help to draw more people to the market, Newbegin believes.

When it was set up, The Ethical Partnership was “appealing to the converted”, a niche market of focused people with defined beliefs and who were receptive to the message, says Newbegin. In general, these were ‘dark green’ investors, committed enough to align their investments closely with their ethical viewpoint, and often putting their principles ahead of investment returns. The first retail ethical fund was introduced by Friends Provident in 1984, but by 1998 there were still a limited number of funds to choose from. “As independent financial advisers we were challenged over whether we could be whole of market. But that ignored where we were coming from,” says Newbegin.

Now there are over 90 socially responsible, ethical, green, and sustainable funds offered to the public by various fund management groups, which has considerably broadened the range and the risk spectrum of the funds.

Yet set that against a total universe of over 2400 UK domiciled funds, and realistically, Newbegin admits, ethical funds are going to struggle to be in the top echelon in terms of performance given their investment restrictions.

“An ethical fund is never going to be able to compete with a focused China fund, for instance,” he says.

But trends are changing rapidly on environmental issues. Investment managers are noting that climate change is a growing investment theme. The scramble between the major utility providers to build offshore wind farms around the British coast is the kind of activity that is attracting fund manager attention.

Clean energy, waste management and water management, as well as climate change technology are all themes in which mainstream fund managers see opportunities.

Ethical funds have had a reputation for being restrictive in terms of their investment parameters and, consequently, their ability to perform for investors. This has deterred all but the more hard line from investing in them. Newbegin estimates no more than 5% of the people invest in ethical funds.

Political, regulatory and economic will are adding to the sound reasons for investing ethically. Companies that take ethical and environmental concerns seriously are being supported by governments, while those which do not are increasingly going to be subject to fines – which will hit their bottom line. Investors are seeing that companies that act responsibly are going to be the better investment.

Rather than avoiding companies that damage the environment, funds are investing in them and working through corporate governance and active engagement to improve the environmental performance of these funds.

They are taking “a lighter touch, a light green approach if you like,” says Newbegin. 

This makes the investment more palatable and opens up more ways to invest ethically to investors.

“What we need to do now is appeal to the investors who are not putting their money to work in an ethical way, to encourage them to invest with a conscious by saying to them we won’t be putting your money in predominantly dark green restrictive funds, we will be taking that lighter touch.”

As ethical investment embraces lighter green, it opens up the range of companies in which fund managers may invest and so can give investors what they also want: potentially good returns.
“Nowadays, you have got to have performance behind the message,” says Newbegin. “Financial security is very important to people. We all know that we will probably have to work longer and that we are going to be more financially responsible for our retirement years, which means people have to get the best returns they can on their money. ”

Moving with the times

It was that focus on returns and the ability to provide best service to clients when the credit crisis hit home that decided Newbegin, among many other IFAs, that they should outsource investment selection to an expert.

“The awful uncertainty of that time crystallised our very real desire to be able to watch our clients’ portfolios more closely, to be able to act defensively if needed, and at the same time take advantage of any investment opportunities should they arise,” says Newbegin.

To that end The Ethical Partnership joined with Minerva Fund Managers and Gloucestershire-based wrap provider Avalon, to establish an ethically and environmentally-focused discretionary portfolio service.

This offers four model portfolios covering the range of risk/reward profiles: the conservative and balanced income portfolios (both of which pay a monthly income), and the balanced growth and adventurous.

Avalon was the first wrap to offer the full range of ethical funds and so was a natural fit for the service.

“The active investment management means investors get the potential for good long-term performance as well as meeting their ethical viewpoint. Which is the basis on which we think the market will grow,” says Newbegin.

The future

So does that mean we will all be investing in green funds in the years to come? Newbegin is optimistic.

“Going back a few years advisers might have been able to persuade people to put 2% of their portfolio into emerging markets. Nowadays it will be a lot more than that.

“In a few years time it will be a case of people putting 10-15% of their portfolio into the environmental and ethical sector. That’s what the market has to look to: but we have to accept that first and foremost investors will be looking for performance, they won’t be investing just for the message.”

If Newbegin’s estimate that currently, ethical investments account for less than 5% of the market, that leaves 95% open to approach. Among them Newbegin says, will be many ‘light greens’ who want portfolio performance but do not want to feel that it comes at the expense of causing ethical or environmental damage.

“This is a potentially huge growth area for IFAs,” Newbegin points out.