Are ethical investment funds outdated?

Julian Parrot (EIA Advisory Group Member)

 At a time when we are seeing more instances of ethical consumer power, Fair Pensions, the responsible investment campaign group, publish a survey today that asks the question are ethical investment funds failing to modernise.

The report raises interesting and timely questions in light of the recent consumer protests at the tax affairs of Starbucks, Amazon and Google and in the wake of the banking crisis and the Move Your Money campaign. The key issue arising is whether the purposes of an ethical investment fund is simply to avoid investing in businesses that fail to meet product based screens such as tobacco or alcohol production, or should it focus its activities on engaging with investee companies to improve their corporate social responsibility. In particular the report cites this as a way to work in partnership with companies with regards to issues such as environmental damage, human rights and perhaps financial accountability.

Despite the significant rise in ethically screened funds over the past decade, the survey points out that 59% of funds rely on mainly negative screening and don’t use engagement to try and influence the behaviours of the businesses that they invest in. Whilst application of negative screens are still relevant to many ethical investors, the default reaction is that an ethical fund should exclude alcohol, tobacco and gambling when in fact these traditional sin stocks screens are not the main issues for many clients today. Whilst it’s relatively easy to screen on a production basis, with the social and environmental issues it’s much more opaque and requires more research and interpretation.

Many of the advisers active in the EIA have long favoured funds that do have a clear positive investment rationale. The issues for many is not just that they have clear screening policies but that the manager is seeking to understand social and environmental issues of importance not just to clients but as future global and economic risks. To that extent many of the funds mentioned positively in the report are favoured by EIA members.

It’s an interesting time in ethical investments with a shift in focus from the large insurance led houses to smaller boutique operations. Hopefully we will see greater evidence of this empowerment of money through engagement as it’s something that investors really do buy into and they would like these funds to be a conduit for encouraging more responsible corporate behaviours.

Link:  http://fairpensions.org.uk/ethicalfunds

Opinions are those of the author – J Parrott; Ethical Futures.

Saturday 8^th December