Viewing posts categorised under: Ethical investing

ESG – How to invest ethically

By Chris Burke
This article is published on: 29th January 2022

29.01.22

Positive Ethical Screening

Over the last few months, I’ve noticed a large increase in enquiries relating to ethical investments. It’s brilliant to see so many people looking and willing to make a positive difference to the world, whilst also in many cases seeing an equally positive return on their investments.  However, I often get questioned ‘What exactly makes an ethical fund ethical?’ and ‘What exactly do the companies that are defined as ethical funds do to make themselves ethical?’

Traditionally, ethical investing has focussed on omitting companies which operate in a non-ethical manner (for example, companies that produce arms or alcohol). However, it is just as important that when investing ethically we also consider the positives as opposed to solely filtering out on the negatives. There are many funds and companies out there who actively make amends to be more ethical, sustainable and make the world a better place, which doesn’t always get taken into account when negatively screening. In this article, I will go over positive screening criteria that I look for in an Ethical or Sustainable Fund. What exactly makes an ethical fund (or company), ethical?

Communication, Lobbying and Engagement
Funds that regularly communicate, lobby and engage with the companies in which their funds invest in. Although there is no guarantee that doing this will make a difference, communication is never a bad thing and there is potential for it to result in positive changes. For example, a fund could issue an ultimatum to a company if they do not act to reduce their carbon footprint. If the firm does not act, then the fund may well disinvest.

For example, Blackrock are pushing for more disclosure from companies. Specifically, they are asking companies to disclose how their business model will be compatible with a net-zero economy. By actively communicating and lobbying the companies which they include in their ethical funds, this will make companies take note and, hopefully, change for the better. If all investment management corporations followed suit, the chances of companies in general becoming more ethical and sustainable would increase.

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Climate Change
Funds that contain companies which actively establish policies relating to reducing the impact of climate change. This could mean reducing their carbon footprint by reducing their mileage or switching their vehicle fleet to electric cars, or by utilising sources of renewable energy such as solar panels and wind turbines.

Various investment management companies such as JP Morgan, Schroders and Templeton all have specific climate change funds. The criteria by which each fund selects does vary, however the goal of all of them is to appreciate by investing in companies which adapt to risks posed by climate change and resource depletion. For example, Schroder do not filter based on sector but they select companies which are based on five themes: clean energy, energy efficiency, sustainable transport, environmental resources and low carbon leaders. JP Morgan operates a specialist thematic approach, utilising artificial intelligence and data science to create a portfolio of sustainable companies. Templeton select companies which exhibit superior climate-change practices and favour companies that provide low carbon solutions, companies transitioning to a low carbon economy and companies that are resilient to climate change.

Human Rights
Funds that favour companies who tackle human rights issues. This could mean by actively reviewing and ensuring that they do not break any human rights issues such as child labour, poor labour or generally poor working conditions. For example, if a firm was to use the services of a subcontractor, then they could actively and regularly audit them to ensure that no human rights issues are present.

Abrdn have a strong human rights stance, as demonstrated in a recent report. As they have an ESG friendly approach for their company as a whole, this naturally flows through into the companies that they select for their fund range (although they don’t have a specific human rights fund). The company performs regular human rights assessments to monitor that they are on track. As stated in the report, their human rights status is underpinned by four core beliefs and they are supporters of the ‘Protect, Respect, Remedy’ framework agreed by the UN Human Rights Council in 2008.

Positive Contributions to Society
Funds that generally screen for companies that make a positive contribution to society. For example, funds that look for companies that create products such as medical products that could save lives or industrial machinery that could help make people’s jobs safer. Furthermore, companies that offer good working conditions including pay, hours and the environment could also be screened positively. A positive working environment could see positive human resources policies within an organisation relating to disabilities, assistance with parental care and flexible working. If a company donates a sizable percentage of their profits to charity, then they could also be included here.

There are many examples of investment companies and funds which positively contribute to society. M&G have one of the most extensive ranges of ethical and sustainable funds ranging from funds that invest in long-life, immovable infrastructure assets to funds that invest in companies which companies that contribute towards the Paris Agreement goals. Furthermore, Prudential have been named as one of the World’s Most Ethical Companies by the Ethisphere Institute for the 7th year running. The award is based on five key categories: ethics and compliance program, culture of ethics, corporate citizenship and responsibility, governance, and leadership and reputation. Prudential were one of six financial services companies out of 132 honourees.

Welfare of Animals
Funds that look at companies that show a general interest in the welfare of animals. For example, this could be ensuring that farm animals have quality facilities, enough space to roam and a lasting, regular supply of food and water. It could also focus on funds that include firms who do not facilitate tests on animals. However, it is important to be aware that a lot of firms test on animals in accordance with ‘best practice’. But is this ethical? The more ethical choice would be to not test on animals at all.

Various funds show a clear interest in animal welfare. This is stated in the various fund factsheets and prospectuses. Morningstar conducted an analysis of funds that are against animal testing. The fund which came out on top, The Vegan Climate ETF Index, describes itself as having zero animal exploitation.

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Fund managers, ethics, green issues and sustainability

By David Hattersley
This article is published on: 18th February 2021

18.02.21

The impact of both Brexit and the Covid 19 pandemic have given us all time to reflect on the world we live in. As consumers in the developed world, we are perhaps more aware of the impact we make on our planet. The words “Sustainable” and “Ethical” spring to mind.

So where does one stand on ethics and sustainability? As individuals, it’s very easy to say “we are Green”, but then travel 70km to stock up on our favourite brands of frozen convenience meals. Most of us, due to “lockdown”, now spend more time cooking and preparing our meals at home.

How far are major companies prepared to change too? Coca Cola has announced plans to make a paper bottle and already has a prototype that can be recycled, which was developed in the Brussels R&D centre. But, whilst that is a very applaudable, one company has gone even further.

I have to admit that there is an affection for them as I worked in one of their divisions for two years prior to a career change to Financial Services. One of the biggest global consumer companies which operates in 190 countries is Unilever. “Love or loathe it” to paraphrase Marmite, they have taken what some may consider a risky strategy. Not only do they try to ensure that the raw materials that go to make their products are as green as possible, they have taken what may be considered a leap of faith. Sustainability and ethics are not only about “green principals”. They are insisting that every part of its global chain of suppliers provide a “living wage”, and in some cases double that, by 2030. These include smallholder farmers as well major direct suppliers numbering in total 60,000. As the CEO, Alan Jope, said in a statement on the 21st Jan 2021, “The two biggest threats that the world currently faces are climate change and social inequality.”

As part of a developed area of the world we should all make a choice. Do we support the ethics of a company that is looking to redistribute wealth and act in an ethical, sustainable way, or do we just look at price rather than value? Have the events of the last year been our wake up call? Morally, rather than just looking at saving tax, or short term political gain and expediency, we should consider what the real legacy is that we leave our children and grandchildren on this planet that we share.

The same questions will be applied by our fund managers, in particular those that focus on ethics, green issues and sustainability. Are they the best choices for the future? I believe so. These specialists have far greater resources than I could ever have to research this “new world” we are entering, and are better equipped to look at the longer term than I am. I would be happy to provide a portfolio of these specialist funds to anyone who is interested, so feel to contact me on any of the points raised.

Ethical investing – what exactly does it mean?

By Chris Webb
This article is published on: 21st February 2019

21.02.19

Ethical, SRI, ESG?

For the average investor, deciding where to invest can be a complicated business. There are many factors and questions to consider, such as risk and return, potential taxes, inflation, dividends, and diversification. Yet now there is a new investment arena becoming more and more popular adding a different question into the mix:

How do you feel about where your money is invested?
I say it’s a new investment arena, and to many people it is, but ethical investing has been around for centuries in one form or another. As early as the 1700s, the Religious Society of Friends, probably better known by the name “Quakers”, refused to participate or invest in the slave trade or invest in weapons of war. But it was during the 1980s that ethical or socially responsible investing (SRI) began to attract the interest of mainstream investors.

It was then that the question of whether the investment is in a company that helps to make the world a better place became more prominent and, to some, just as important as the stock price.

Socially responsible investing (SRI) is the act of choosing your investments on the basis of social good as well as looking for financial gain. The main points investors look for are known as ESG, which stands for Environment, Social Justice and Corporate Governance, and although most investors aren’t socially responsible investors yet, their ranks are growing. As at 27 September 2017, UK investors were estimated to have more than £19bn invested in green and ethical funds.

SRI is choosing investments that are in line with your own personal values. However, those values aren’t the same for all investors. There are many areas to consider, the most common being:

Cleaner Environment: “Green” investors prefer companies that don’t pollute the environment. Some refuse to invest in traditional “dirty” fossil fuels and lean towards companies specialising in renewable energy, while others look for companies that focus on reducing the carbon footprint of their products and services. Interestingly, some of the world’s largest oil companies are focusing more and more on green, clean distribution channels.

Social Justice: Some investors refuse to do business in countries with a record of human rights violations. Others look for companies that provide their workers with a fair working wage and appropriate working conditions.

Health: Many SRI investors refuse to invest in companies that sell tobacco or alcohol. Others refuse to invest in products that they think pose a threat to human health, such as genetically modified organisms and chemical companies.

Morality: Many socially responsible investors will attempt to avoid all “sin industries” such as alcohol, tobacco and gambling to name a few.

Traditionally, ethical investments have been seen as feel good investments and many investors are turned off by the idea of investing ethically because they believe that it may mean sacrificing returns. However, this isn’t necessarily the case.

While it is possible to invest directly into ethical companies, putting your money into individual shares is a comparatively risky strategy. Many investors prefer instead to opt for ethical mutual funds, which invest in a broad range of socially responsible companies.

Some of the funds will utilise a negative screening model, this means simply refusing to invest in companies, jurisdictions or asset classes that don’t meet the required standards. It’s a blanket decision to avoid them. For instance, many socially responsible mutual funds screen out tobacco companies. An alternative method is positive screening, which is actively choosing companies due to their responsible working conditions. An example of this would be to choose companies that have signed the CERES principles – https://www.ceres.org/about-us

So how do you get involved?
Putting your money into an SRI fund isn’t all that different from making any other investment. All you’re really doing is adding an extra step to the process. There are two areas to consider during the decision-making process.

What is your social goal? What is really important to you?

What is your financial goal? What do you expect to get out of it?
So, you need to decide what your social goals are, what your values are and what is important to you from an emotional perspective; then you need to add the second layer, which is your financial goal and explore whether it fits within your attitude to risk and whether the potential returns are acceptable to you. You may find that this limits what options are available to you, but there are some great funds out there that will diversify across multiple asset classes and jurisdictions whilst maintaining an ethical overview across the board.

Moving your money into socially responsible investments is a win-win for some investors. It lets you make the most of your money in two different ways. You have the potential to earn good returns, and at the same time promote values that are important to you. The only real downside is that it takes a bit more work to find the right investments to meet two sets of goals, social and financial, instead of just one.

Do you engage in socially responsible investing? Is this something that interests you?

To discuss how and where to get involved in ethical investments, get in touch on 639118185 or by email to chris.webb@spectrum-ifa.com