Just two years ago, there were 50 ethical funds in the UK. Today there are almost 90. Just three years ago, assets under management in ethical funds totalled £4.5bn. Today, they total almost £8bn. And as climate change not only takes centre stage in British politics, but also seeps ever deeper into the conscience of the UK public, these numbers will continue to rise exponentially. So while ethical investing remains a niche sector for now, it will soon break into the mainstream.
Inevitably, therefore, more and more fund management houses will feel they have little choice but to launch an ethical product. The problem is, many simply don’t have the experience, or knowledge, to do so.
“There is no shortage of funds that don’t know what they’re doing”, says Lee Coates, director of adviser Ethical Investors Group. He cites one example of a manager that devised its own ethical agenda but completely neglected to include any human rights or environmental impact criteria, and this even after an independent ethical data provider had been consulted. It acted in good faith, but simply did not have the necessary expertise.
Many funds, then, may not be quite as ethical, green or sustainable as investors might expect. For example, CIS Sustainable Leaders invests in companies involved in alcohol, animal testing, gambling and pornography. Old Mutual avoids all these sectors, but has exposure to nuclear power. In fact, some funds will invest in companies that simply acknowledge ethical issues even if they do very little to confront them. Mining stocks that recognise their environmental impact, for example, can often be deemed acceptable. Coates cites Neptune’s Green Planet and SVM’s All Europe SRI as examples of such funds. He also steers well clear of Prudential’s Ethical Trust as so little information about its investment criteria and underlying holdings is available.
Another area that can mislead investors is engagement. This is when fund managers, as shareholders in a company, lobby for change from within. It may sound admirable, but, as Coates reveals, at best: “Managers don’t get to the meat of corporate activity, but tend to focus on very soft issues – such as disclosure – where change is more easy to effect. Deadlines are very rarely set and the underlying threat of disinvestment is never used.” At worst, engagement can be used by managers as an excuse to invest in companies with questionable ethical credentials under the pretext that they are pressing for positive change. This means fund managers can take advantage of investment opportunities that should rightly be off limits. “Using recycled paper to print pornography”, jokes Coates, “would not suddenly make its publisher acceptable to most ethical investors.”
But there are a number of very strict ethical funds available in the UK, and none more so than that run by Aegon Asset Management. It cannot invest in all the usual armaments, tobacco and pornography sectors, but also excludes all stocks that are involved in animal testing and factory farming, for example, which include all supermarkets and transport companies. Other strict funds include Henderson Global Care Growth, Jupiter Ecology, Norwich Union Ethical UK and Standard Life UK Ethical.
But there is no single definition of what constitutes ethical, so each fund is different. This is because each individual has his or her own view of what constitutes right and wrong. So investors have to be comfortable with the underlying holdings of the fund they intend to invest in. And that means transparency is the most important issue when investing in an ethical fund.
Many fund managers are well aware of this but others are not so forthcoming. They should be happy to provide comprehensive information on their ethical investment mandate and criteria. This includes details of the three broad strategies used by ethical fund managers: screening, where companies are deemed both unacceptable and acceptable depending on their activities; preference, where companies are rated according to their ethical, social and environmental impact; and engagement.
Some of the issues included in these strategies are: human rights policies, codes of business conduct, environmental policies and management systems, equal opportunities, training and development, job creation and security, child labour programmes and community involvement – not just for the company itself but those that make up its supply chain.
