3 min read 28 May 21
In our latest sustainable and responsible investment (SRI) webinar in May, Julia Dreblow of SRI Services was joined by Craig Hart of discretionary fund managers King & Shaxson Ethical Investing and Sean Hawkins, Head of Strategic Partnerships at Ascentric, to explore the evolution of ethical investing: how it can be defined and the breadth of strategies it now embraces.
The first ethical funds – the Friends Provident Stewardship Funds – were launched in the early 1980s, driven by the investment needs of Quakers and Methodists. As well as providing the initial foundation for all future SRI disciplines, says Dreblow, these early ethical funds need to be credited with starting the process of corporate engagement to encourage improvement in company practice that is so widespread today.
So what makes ethical investing different from other SRI disciplines? The key differentiator, say Dreblow and Hart, is the strong element of personal values that’s built in. Ethical funds can allow investors to avoid industries and activities at odds with their personal or religious beliefs and concerns. Reflecting their Methodist and Quaker roots, traditional areas of exclusion are tobacco, alcohol, armaments and gambling. Areas of more current concern may be excluded too, such as deforestation, pollution, fast fashion, and companies with poor records on workers’ rights, diversity – or even paying tax.
Ethical funds are primarily associated with ‘negative’ screening and avoiding certain activities – and this can appeal to clients whose prime focus is on avoiding companies doing harm. Although not as intensively proactive as ‘impact funds’, many ethical funds are also still focused on seeking out companies that are making a positive social or environmental contribution. Ethical bond funds, says Hart, can have a strong focus on social housing, for example.
ESG risks and stewardship may also be a consideration (although the latter, says Dreblow, may generally be less of a focus because the tendency is to invest in companies that are already performing well on most screens).
Of the total SRI fund universe, the proportion of funds labelling themselves primarily as ‘ethical’ has shrunk (currently accounting for 36 funds out of a 272-strong field according to SRI Services’ Fund EcoMarket database). This is largely due to the market focus turning to issues such as sustainability and climate change. But around 87 funds overall claim to incorporate ethical policies of some kind – so choosing the most appropriate fund for a client does require extensive research of the market.
A key task for advisers, says Dreblow, is taking the time to understand what an ethical fund will and won’t invest in, as policies can vary hugely. While certain exclusions such as tobacco or arms are broadly common to most ethical funds, they may take very different views on areas ranging from animal testing (seen by some as crucial to healthcare advancement) to nuclear power (seen by some as crucial to clean energy). “Get under the bonnet to see what a fund actually intends to include or exclude. After all, you can’t criticise a fund for something it never promised to do,” says Dreblow.
The process used to assess a client’s goals is also critical, says Hart. “Both questioning and education of the client are really important. There is a danger that if your questioning is too inflexible or too detailed you can end up with a set of client requirements that is virtually impossible to meet.”
He adds: “Sometimes a client may need to be pragmatic, and be okay with most of a fund…But if a client wants absolutely no grey areas in their portfolio, then it may be necessary to create a bespoke ethical portfolio based exactly on what they do and don’t want.”
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