Eth­i­cal in­vest­ments can be costly and com­pli­cated

As in­vest­ment in so­cially con­scious funds ac­cel­er­ates, Harry Bren­nan finds those who jump on board risk be­ing left be­hind

The Sunday Telegraph - Money & Business - - Front page -

Eth­i­cal in­vest­ing is be­com­ing an in­creas­ingly pop­u­lar op­tion for savers who want their money to be put to­wards en­vi­ron­men­tally and so­cially con­scious com­pa­nies that can pro­vide de­cent re­turns at the same time. How­ever, over the past decade, the per­for­mance of eth­i­cal funds has been woe­ful, fall­ing well short of con­ven­tional equiv­a­lents, mean­ing any­one with cash in­vested could have missed out on hun­dreds of thou­sands of pounds in po­ten­tial gains.

In­vestors have piled around £11.7bn into the 450 eth­i­cal funds avail­able to buy in Bri­tain this year, ac­cord­ing to Morn­ingstar, the in­vest­ment re­search group. But, at least on the ba­sis of past per­for­mance, the in­vest­ment case is as yet un­proven.

If you had in­vested £100,000 in the past decade’s top-per­form­ing eth­i­cal fund 10 years ago, rather than the top-per­form­ing con­ven­tional fund, you would be £302,650 worse off, ac­cord­ing to re­search from Fund Ex­pert, the in­vest­ment anal­y­sis tool. Fur­ther­more, if you look at a spe­cific area such as the UK All Com­pa­nies Sec­tor, the top “green” fund, Stan­dard Life In­vest­ments UK Eth­i­cal, grew by 162pc over the 10-year pe­riod, dwarfed by the per­for­mance of the strong­est con­ven­tional fund, Slater Growth, which grew by 392pc, a dif­fer­ence of £230,040.

The Stan­dard Life fund was the only eth­i­cal fund to make it into the top 20pc of the best-per­form­ing funds in its sec­tor.

Fund Ex­pert said: “Tick­ing an eth­i­cal box comes at con­sid­er­able cost” and any­one pur­su­ing a “green” in­vest­ment strat­egy runs the risk of ex­clud­ing a large num­ber of vastly more prof­itable in­vest­ment op­por­tu­ni­ties.

Ex­perts have said that eth­i­cal funds have un­der­per­formed in the past be­cause they have ex­cluded com­pa­nies that do not fit with the funds’ cri­te­ria, lim­it­ing the in­vest­ments avail­able.

Hortense Bioy of Morn­ingstar said: “Strict ex­clu­sion­ary screens can pre­vent man­agers from in­vest­ing in re­li­able, high-qual­ity stocks, and this can af­fect per­for­mance.” For ex­am­ple, she said, a num­ber of eth­i­cal funds ex­clude to­bacco com­pa­nies, but stocks like Bri­tish Amer­i­can To­bacco have per­formed ex­cep­tion­ally well over the long term.

She added that while past per­for­mance on the whole has been poor when com­pared with other funds avail­able, con­tem­po­rary eth­i­cal funds now per­form on a par with con­ven­tional peers. She said the in­dus­try had moved on from “pure ex­clu­sions to a more in­te­grated ap­proach that looks to re­duce risk and en­hance re­turns” by en­gag­ing with firms and mak­ing a pos­i­tive im­pact from within.

For ex­am­ple, an eth­i­cal as­set man­ager with a stake in a cop­per mine that emits a lot of sul­phur diox­ide may seek to work with the com­pany to re­duce those emis­sions.

How­ever, some say this has blurred the line be­tween eth­i­cal and other funds.

Dan Far­row of SNB Wealth Man­age­ment, a fi­nan­cial ad­viser, said all fund man­agers had a man­date to hold the com­pa­nies they are in­vested in to ac­count.

He also said the “en­gage­ment ap­proach” meant funds could in­vest in vir­tu­ally any com­pany they wanted, no mat­ter how un­eth­i­cal, on the grounds they were steer­ing the busi­ness in a new di­rec­tion. “Sus­tain­abil­ity is the cor­po­rate buzz­word at the mo­ment, so find­ing a com­pany that waxes lyrical as to how sus­tain­able the busi­ness op­er­a­tions are is not hard,” he said.

He added that eth­i­cally minded in­vestors of­ten failed to dis­tin­guish be­tween funds that mar­ket them­selves as “sus­tain­able” and those that claimed to be “eth­i­cal”. He said “sus­tain­able” sim­ply re­ferred to a good busi­ness that could weather fu­ture storms, whereas “eth­i­cal” was some­thing en­tirely dif­fer­ent.

“If we had clients who were adamant that they wanted to in­vest eth­i­cally, it would put us in a dif­fi­cult po­si­tion. It would mean we would have to of­fer them over­priced, un­der­per­form­ing strate­gies,” he said.

Some 49pc of savers be­lieved so­cial val­ues were as im­por­tant as re­turns when it came to in­vest­ing, ac­cord­ing

to sav­ings and in­vest­ment provider Foresters Friendly So­ci­ety, and 27pc would ac­cept lower re­turns as long as their in­vest­ments were eth­i­cal.

This is just as well, ac­cord­ing to Mr Far­row, who said eth­i­cal in­vest­ing was akin to a client not want­ing to max­imise their re­turns. “If we didn’t try to make more money, then we would not be do­ing our job,” he said. “Even the Church of Eng­land shuns ‘eth­i­cal’ in­vest­ing. Why? Be­cause its in­vest­ment man­agers have been given a man­date to make as much money as they can, and they won’t be able to do this by tak­ing the eth­i­cal route.”

The Church of Eng­land is com­mit­ted to “re­spon­si­ble in­vest­ing” and re­fuses to in­vest di­rectly in cat­e­gories such as to­bacco. How­ever, it re­cently faced claims of hypocrisy as it con­tin­ued to in­vest sub­stan­tially in Ama­zon, de­spite the Arch­bishop of Can­ter­bury ac­cus­ing the firm of hav­ing “leeched off the tax­payer”. At the end of 2017, the Church’s na­tional in­vest­ing bod­ies agreed to an en­gage­ment strat­egy with fos­sil fuel firms, with dis­in­vest­ment as “a last re­sort”.

Rob Mor­gan of Charles Stan­ley Di­rect, an in­vest­ment firm, said it was un­fair to judge eth­i­cal in­vest­ing as a whole, based on its his­toric per­for­mance.

“Even five years ago, your choice was much more lim­ited but the fund providers are re­spond­ing to de­mand. We are now start­ing to see new and in­ter­est­ing choices on the mar­ket. We should start to see bet­ter per­for­mance as com­pe­ti­tion hots up.” How­ever, Mr Mor­gan con­ceded that there was still a dan­ger that savers could be duped by some fund groups claim­ing to be eth­i­cal without mak­ing spe­cial ef­forts.

“It is cer­tainly a dan­ger. Any fund man­ager can point to a com­pany that it has ‘en­gaged’ with,” he said. “In­vestors need to look very closely at what they are buy­ing, and ex­am­ine what the fund’s un­der­ly­ing hold­ings are.”

He added that in­vestors should look for a fund man­ager they could see had eth­i­cal con­sid­er­a­tions at the heart of its work, rather than sim­ply as a lazy af­ter­thought that at­tempted to tap into the in­creas­ing de­mand for greener in­vest­ment choices.

The Church Com­mis­sion­ers in­vest in Ama­zon, de­spite Justin Welby’s cri­tique

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