I was asked for an ethical pensions scheme and then promptly ran into a few issues about what is ethical? “Ethical investment” is the idea that you can make the world a better place by placing your investment money with investment managers and companies that would use your money to invest in activities and industries that you approve of. To some extent, making a profit or investment gain is secondary to how it is done, but an investment has to show a return, otherwise it becomes a charity.
There are a lot of funds that claim to be “ethical”, but there is little consensus about the nature of the investments to be included or excluded, so one person’s ethical fund could be another’s despoiler of the natural world.
As independent financial advisers, we have a process to screen ethical funds which starts by asking the client, in some detail, what activities they approve of, which they want to exclude and which they are prepared to tolerate, if necessary, to make up a portfolio. This produces a short list of suitable funds and we will, in turn, select a product provider that gives us access to the funds, with terms that are acceptable to us and the client.
All of this requires access to a lot of data and regular reviews as fund constituents will change over time; companies will change policies and news events may make some things unacceptable.
To give you some idea of the screening criteria, just think about avoiding all of the following:-
· Animal issues –fur
· Animal issues – intensive farming
· Animal Testing – non-medical
· Armaments – non strategic
· Armaments – strategic
· GM Development
· GM Use
· Human rights – evidence based
· Nuclear Power
· Nuclear services
If you chose to avoid all of these within your portfolio, then it becomes very hard to use any of the common ethical funds available, as all of them will tread on some of these toes somewhere. You find yourself looking for a “best fit” or “least bad” solution!
There are some consumer websites that try to address the idea of ethical investments, but I have my concerns over the depth and timeliness of the research used.
This website requires you to join as a subscriber before you get full access, but rates funds that would be excluded by the criteria above as 12 out of 20. As always, the devil is in the detail and I have concerns about the frequency of updates.
This website makes no recommendations and suggests the use of independent financial advice. It includes the majority of funds that declare themselves as “ethical”, providing that they actively exclude more than just tobacco.
One thing any investor can do for themselves is look up the funds used in any portfolio on the Internet. www.trustnet.com list all of the retail funds available in the UK using a standard format and lists the fund objectives and the top few holdings. Just as an example, this is the fund objective for the Axa Ethical Distribution R Acc fund.
The aim of this Fund is to achieve growing income with some prospects for capital growth over the medium to long term. To achieve its objective, the Fund will aim to invest in UK equities of companies and sterling denominated corporate bonds issued by companies, in accordance with its ethical screening criteria, whose products, services or method of operation do not involve, conduct or carry out testing on animals or use of animal tested product gambling, violations of human rights, intensive farming, significant sales to the international military, unacceptable levels of water pollution, the use of unsustainable timber, activities deemed detrimental to the Third World, or derive a significant proportion of their annual turnover from fossil fuels, energy intensive industries, mining, nuclear power, ozone depleting chemicals, pornography and adult entertainment or tobacco. The Fund may also invest in UK Gilt Edged Securities as well as UK Index Linked Gilts. The Fund will invest predominantly in the UK, however, the ACD reserves the right to invest some element of the portfolio in other geographical areas if it is considered to be in the interest of the Fund. The Fund may invest up to 50% of its value in securities issued by the UK government. The latest ethical policy for the Fund is available upon request. The Fund may also invest at the Investment ACD’s discretion in transferable securities, derivatives, cash, deposits, units in collective investment schemes and money market instruments. Use may be made of borrowing, cash holdings, hedging and other investment techniques permitted in applicable Financial Conduct Authority’s Regulations
Looking at the top 5 holdings, 3.30%of the fund is invested in Diageo PLC, a company that owns most of the major drinks brands in the world. This would make it unacceptable to some church groups, all temperance societies and some medical charities, before we start worrying about individual preferences!
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The information contained is for guidance only and does not constitute financial advice. It is based on our understanding of UK legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change. Accordingly no responsibility can be assumed by Martin-Redman Partners its officers or employees, for any loss in connection with the content hereof and any such action or inaction.