Profits with principles in ethical spending boom
With more consumers 'going green', investors can prosper
Ethical consumerism is no longer a niche for idealistic hippies who wait with bated breath each week for the arrival of their boxes of organic vegetables.
Britons spent almost £30bn on ethical products in 2005, according to a report published by the Co-operative Bank. To put that figure into context, the amount that households spent on ethical goods last year - from organic food to specialist financial services € increased by 11% compared to 2004.
Household spending as a whole rose by just 1.4% over the same period.
The providers of many of these products and services are clearly in a lucrative business. The good news for them - and their shareholders - is there is plenty of room for growth.
Ethical spending may have outstripped spending on beer and cigarettes last year for the first time in the UK but it still represents just 5% of the total value of the average household's shopping basket.
For investors keen to capitalise on the potential of ethical consumerism, there are two possible routes. The first option, which will appeal to investors attracted as much to the ethical part of the equation as the potential profits, is the pure play - that is, those companies that provide only ethical goods and services.
The alternative is to focus on established companies that are embracing the ethical consumerist boom. Sainsbury's organic vegetable sales, for example, beat the total combined sales of all those vegetable box companies by some distance.
Harriet Parker, a socially responsible investment analyst on Norwich Union's range of Sustainable Future funds, says both approaches are valid.
"Ethical should be an important investment theme for everyone," she argues.
"It's not just that climate change has moved up the agenda. Education has improved too and improving wealth means that many people have more money to spend on ethical products."
Joe Walters, manager of CIS Investments' UK Growth Trust, adds: " Regardless of your views on ethical issues, these companies are experiencing strong revenue growth, strong profits growth and, for that reason, alone they should be attractive."
For Parker, companies that are capitalising on ethical consumerism will have many of the attractions that all investors look for. They are often able to charge a premium for their product or service, for example.
They are also less likely to suffer from brand damage - crucial in a commercial world where increasing numbers of customers say that they make purchasing decisions with companies' reputations in mind.
There are also gains to be made when the specialist players meet the mass market. Mergers and acquisitions activity is an increasingly important theme for ethical-fund managers, as long-established large companies try to buy into the growth story. L'Oréal's purchase of The Body Shop earlier this year, for instance, is unlikely to be the last attempt by a multinational to buy ethical credibility.
Sometimes the opportunities may be less obvious. Parker points out that the beneficiaries of ethical consumerism may be some way back down the supply chain. She currently likes the shares of the speciality chemicals business Croda International because it is a major supplier of "natural" ingredients. (See story below.)
Some sectors are likely to be more useful hunting grounds than others. Audrey Ryan, who manages the Aegon UK Ethical Fund, says many of her largest holdings come from areas such as support services and health.
Financial services can also be important. One of the fund's largest holdings is in Impax Environmental, a specialist in green investment.
The transport sector is also of interest, according to Bozena Jankowska, head of the sustainability research team at investment manager RCM. She says that, as in other areas, both specialist green players and traditional companies stand to benefit.
"The mid-term elections in the US have been very positive for ethanol companies, given that the Democrats are already starting to talk about the need to take action over climate change," she says. "Car companies will also be forced to start looking at producing a greater number of flex fuel vehicles and hybrid vehicles."