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In the last few months, a number of major stockbroking houses in the United States, including JP Morgan and Citi, have quietly cut their ethical investment research teams.

Job losses at these beleaguered financial services giants are hardly surprising, but the decision to completely slash these teams rather than just reducing their size could be taken as a sign of Wall Street’s attitude towards ethical investing – wealthy clients might like the idea of portraying themselves as investors with a conscious when markets are booming, but in tough times, making money is all that counts.

There is little doubt that wealthy investors have flocked to ethical and socially responsible investing in recent years. Europe provides a good example of this trend. Research by the European Social Investment Forum (EuroSIF) found that high net worth individuals in Europe have around 8% of their portfolios in ethical assets, or around €540 billion.

This looks set to grow sharply. EuroSIF’s survey of wealthy investors and wealth managers taken by EuroSIF in the middle of last year found huge interest in ethical investing. In spite of the tumultuous conditions on financial markets, 87% of respondents said interest for sustainable investments would grow in the next three years and 75% of surveyed family offices said sustainable investment will increase in the generational transfer of their family’s wealth.

EuroSIF estimates that by 2012, wealthy investors will have 12% of their portfolios in ethical investments, or more that €1 trillion, with the bulk of the funds coming from newly wealthy entrepreneurs and existing investors.

It’s a bold prediction, particularly given the shocking performance of equity markets in Europe and around the world, which is likely to have lopped between 30% and 50% off the fortunes of most wealthy entrepreneurs.

Many in the ethical investment industry are worried about how their relatively immature market will cope with a downturn of this magnitude. Will spooked investors simply retreat to familiar investments and dump their commitment to socially responsible investing?

So far, it appears wealthy investors are sticking to their ideals.

In October, at the height of the credit crisis, outflows from European managed funds hit €154 billion, or 0.11% of total funds. By contrast, outflows from green funds were €834.7 million or 0.05% of total funds, and socially responsible investment (SRI) funds lost €496.3 million, or just 0.01% of their total.

Exactly how long wealthy investors remain committed to ethical investments probably depends on whether these funds can hold their own against non-constrained investment options.

While measuring the performance of SRI investments is a fairly contentious issue (mainly because of the huge variety of SRI funds out there) research from fund research firm Lipper shows that between 2003 and the peak of the US equity market in 2007, the median SRI fund underperformed the median regular fund by around 2%.

Further to this, there is some research to suggest that ethical investments funds may be at a disadvantage during a downturn because they exclude so-called sin industries such as alcohol, tobacco and casinos, which tend to do rather well during recessions. Indeed, analysis released last year by Merrill Lynch shows that, during the six recessions since 1970, alcohol, tobacco and casino stocks have, on average, returned 11%, compared with a 1.5% loss for the S&P500.

However, this recession appears to be a little different, and cigarettes, whisky and punting just aren’t holding up like they used to – in Australia, gaming and alcohol stocks have been particularly savaged in recent months.

Ethical investments, on the other hand, appear to be holding their own. The editor of British SRI site Responsible Investor, Hugh Wheelan, says SRI funds have actually outperformed their mainstream counterparts, returning -40.7% compared with -41.8%. They are not exactly pretty results, but wealthy ethical investors can take heart that they won’t lose out too badly if they follow their convictions with their portfolio.

The debate about whether investing ethically can deliver better returns over the long term is unlikely to be solved any time soon – a quick internet research reveals any number of academic papers and pieces of broker research supporting both arguments.

Anyway, the rise in ethical investing among the wealthy appears to be driven by more than raw figures. A generational change appears to be taking place in the high net worth individual community, and this younger breed want to be seen to do the right thing.

As one wealthy respondent told the EuroSIF survey: “Successful entrepreneurs of today are not the industrialists of yesterday.”

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