The Daily Telegraph - Saturday - Money
Ethical investing boom makes ‘sin stocks’ cheap
The ethical investment boom has given DIY investors the chance to buy “sin stocks” at unjustified discounts, experts have said, as more companies become blacklisted by large institutions.
Last year, one in three pounds invested in funds went into those that take into account environmental, social and governance ( ESG) factors, according to financial data group Morningstar.
Heavyweight investors are increasingly selling their stakes in companies they view as failing to meet these ethical standards.
This week Larry Fink, head of the world’s largest investment manager BlackRock, warned it would pressure companies to hit net-zero carbon emission by 2050 and sell shares if they did not do enough.
The world’s biggest sovereign wealth fund, Norway’s £ 940bn government pension fund, last year sold shares in mining giants Glencore and Anglo American because they breached its guidelines on income me generated from coal. Security contractor ractor G4S was also offloaded due to the risk of “serious violations of human rights” ghts” and the fund does not invest in oil and gas exploration companies or tobacco obacco firms.
Ethical funds tend d to have strict rules about the stocks they ey can hold, excluding oil, tobacco, armament mament and coal mining companies, and their management teams can n also ditch stocks on a case- - by- case basis if a scandal comes to light. Their growing owing dominance means that stocks that are not considered ethical are having share prices es bid down.
Gemma Wooddward, of investment nt group Quilter Cheeviot, said investors rs focused purely on returns, with no consideration of envinvironmental or societal etal issues, could find opporpportunities in sin stocks ks that were under pressure. e.
Shares in tobacco co companies represent ent the best potential bargains, argains, according to Joe Healey of stockbroker The Share hare Centre. Cigarette makers akers are excluded from many ny investment funds, including uding the £8bn Church of England pension fund.
Mr Healey pointed to Imperial Brands, whose shares have halved in value over the past three years despite the business making just as much money, and the stock’s high 9pc dividend yield.
“Investors are selling even as profits are flowing. If you can look past the ethical questions, they are still great companies,” he said.
Oil stocks are more complicated, according to Mr Healey, as their business model is fundamentally challenged by the push towards green energy.
“Oil demand could return in the short run, which would pay back investors willing to bet against the ethical investing boom, but over the longer term the sector faces a lot of challenges,” he said.
Mining companies are often targeted by ESG investors for weak governance. Last year Rio Tinto was criticised for destroying Australian indigenous caves in a mining blast, for instance. But that has not dented the returns from miners’ shares: the FTSE 350 Mining index is up by more than 330pc over the past five years.
Mr Healey said a scandal could provide a good opportunity for investors to buy discounted shares if they were not put off by ethical questions.
Shares in Boohoo, the online fashion retailer, have risen nearly 60pc following last year’s scandal over factory working conditions.
However, discounts on sin stocks could soon disappear as “engagement” – where investors hold on to shares but attempt to help companies meet governance or climate change goals – takes over from exclusion as the leading ethical strategy.
Dave Barron, of Legal & General Investment Management, Britain’s largest investor, said exclusion was key to the first wave of ESG investing but was now becoming less popular.
“The future is about incentivising companies to change their behaviour, rather than cutting off funding. Bad sectors have good companies in them th that can change their ways and make a m more positive impact,” he said.
Mirabaud, an asset manager, said exclusion and engagement both had a part to play but engagement was a more effective tool to make businesses change their ways.
“Our approach is to have sustainability-focused engagement meetings with companies to address the most material ESG issues,” it said.
Mr Barron warned that investors should not try to time their entry into stocks that ethical funds were selling. He argued that as ethical investment had only recently become more widely adopted, there was not enough data to suggest shares shunned for ethical reasons would bounce back.
“It is still too soon to know if there is an opportunity here for contrarian investors and often other f factors, such as the pandemic, dominate why stocks move. We believe that good ESG scores lead to good longte term returns,” said Mr Barron.
Ms Woodward said taking into a account ESG metrics was an importa tant part of the investment process a and could help deliver better returns o over longer time periods.