04/05/2007
Ethical Investing
Ethical funds are a popular choice for people with strong concerns about environmental and social issues. Investing ethically can provide the satisfaction that comes from putting personal values into practice, as well as offering the potential for financial return.
Ethical funds specify the types of companies they won't invest in and give investors the opportunity to avoid putting their money into companies whose activities they disapprove of. The typical exclusions rule out investment in companies that contribute to environmental pollution or are involved in tobacco or alcohol production, weapons, nuclear power and animal testing. Companies that fail to respect human rights in their operations are often excluded as well.
Many ethical funds recognise that investors want to do more than simply screen out the companies that fail these criteria. Investors want to put more of their money into companies that are trying to make the world a better place in which to live by developing or using environmentally friendly technologies, contributing to improved living standards in emerging economies and adopting good employment practices. Some ethical funds reflect this desire by having a preference for investing in companies that meet these positive standards.
Ethical screening can present complex dilemmas. For example, should companies be declared ineligible for investment because they operate in a country where the government does not respect human rights? Or should the company's own policy and practices be examined to determine whether they comply with Western standards? Are there some countries, such as Burma or Sudan, where it is impossible for a company to operate to Western standards?
It should be obvious that no one answer will satisfy all investors. As you would expect, individuals have different views about what is ethically acceptable or preferable. It is important for ethical funds to state their ethical policy clearly so that investors can identify which funds are most aligned with their views. Clear and specific criteria are also easiest to apply objectively and consistently, which give investors confidence that ethical screening is performed in a systematic, even handed manner.
An interesting question, rarely discussed, is how ethical fund providers decide on the criteria for their funds. Some fund managers set up committees of experts to provide advice on what criteria should be used. An alternative approach is to survey the fund's investors to determine their concerns. We have surveyed our investors' attitudes every year for the last ten years and have used the results to make sure that our criteria reflect their top priorities. These surveys also give investors the chance to highlight new and emerging issues that can subsequently be included in the criteria. Our ethical funds have incorporated concerns about genetic engineering and bribery and corruption after they were identified in investor surveys.
Ethical fund providers will include as many investor preferences as possible in their negative and positive criteria. However, it is important to acknowledge that not every issue can be included in an ethical fund's policy. When adopting criteria fund managers must strike a reasonable balance between the desire to reflect investor views and the need to provide returns.
Many ethical fund providers will engage with the companies in which they invest to encourage higher standards on environmental, social and ethical issues. They do this through meetings and written communications which emphasise that good management of these issues contributes to long term success in building brand and reputation, better risk management, improved cost structures and improved employee productivity. This type of responsible engagement ensures that companies get the message that it is important to focus on and invest in programs that address environmental, social and ethical issues.
In addition to engagement, fund managers often demonstrate their commitment to shareholder responsibility by becoming signatories to group statements of principle. The most recent of these is the United Nations Principles for Responsible Investment (UNPRI), which has received endorsement from global investors representing $8 trillion. The UNPRI aims to help integrate consideration of environmental, social and governance (ESG) issues by institutional investors into investment decision-making and ownership practices, thereby improving long-term returns to shareholders. The Carbon Disclosure Project (CDP) is another investor collaboration on the business implications of climate change. In February 2007 the CDP sent a letter to over 2400 corporations on behalf of more than 280 institutional investors with assets of more than $41 trillion asking for information on greenhouse gas emissions.
Sceptics of ethical investing have argued that adopting exclusionary criteria makes ethical funds less likely to produce good financial returns in years when companies in the excluded sectors are market favourites. There is, however, a wide range of ethical funds on the market which dispel this theory and boast performance which is either aligned with or beating mainstream equity funds.
The ethical fund market has experienced significant growth over the last few years, with pooled ethical funds growing from £3.3 billion in 2000 to £6.1 billion in 20051. With the prominence of issues such as climate change and fair trade, this is easy to understand. More providers are also offering an ethical approach to bond investments in addition to equities. Furthermore, we think it likely that investors will see more ethical offerings in asset classes such as property and private equity in the future. It's definitely worth investors noting these funds and taking time to weigh up their principles and priorities when it comes to ethical investing!
1. EIRIS, www.eiris.org
Julie McDowell, Head of Socially Responsible Investment at Standard Life Investments
First published in Investment Week 14 May 2007
Standard Life Investments Limited, tel. +44 131 225 2345, a company registered in Scotland (SC 123321) Registered Office 1 George Street Edinburgh EH2 2LL.
The Standard Life Investments group includes Standard Life Investments (Mutual Funds) Limited, SLTM Limited, Standard Life Investments (Corporate Funds) Limited and SL Capital Partners LLP. Standard Life Investments Limited acts as Investment Manager for Standard Life Assurance Limited and Standard Life Pension Funds Limited.
Standard Life Investments may record and monitor telephone calls to help improve customer service.
All companies are authorised and regulated in the UK by the Financial Services Authority.
©2008 Standard Life Investments.
RSS Press Articles