Ethical investing can be a moral minefield but what exactly are the pitfalls and how can you avoid them? Salt magazine sets out to turn a walk through a minefield into a stroll in the park.
Fifty shades of grey might not be the first thing you associate with ethical investing but with lack of transparency, differing moral outlooks and an ever-changing landscape of issues, it is a fair description of a field that is anything but black and white.
Traditional investment funds typify this moral complexity. With each fund investing in dozens of different companies, spreading the risk also spreads the chance of investing unethically. How can you be sure that all the businesses your money is invested in correspond to your ethical values? So-called ‘ethical funds’ are on the increase – there are now around 100 to choose from – but can they really hope to cover all the ethical bases?
One of the problems, according to Jason Hollands, Managing Director of investment group Tilney Bestinvest, is that a broad approach that attempts to rule out everything unethical, also wipes out most investments. “As an ethical investor,” said Hollands, “you’re going to have to make some compromises because it’s very unlikely you will find an investment fund that ticks every single box you care about.” It’s also unlikely that your ‘right’ won’t be someone else’s ‘wrong’. Hollands gives the example of the pharmaceuticals industry where conflicting moral positions are defended with equal passion. Would you consider it ethical to invest in a company that tests products on animals? If you’re an animal rights protestor, probably not. But what if it helps find a cure for cancer?
You might even find that the moral issue you thought you were clear on throws up its own investment dilemmas. A number of funds that were launched five or six years ago specifically around climate change might also, according to Hollands, invest in GM crop companies.
Even if you manage to spot the obvious ethical anomalies, others might be too small or well-hidden to notice. “As an ethical investor,” said Hollands, “you don’t want your money invested in land mines or cluster bombs. There aren’t many companies out there involved in the manufacture of these, but there might be hundreds of companies involved with the production of components.” The same goes for another of the so-called ‘sin sectors’ that are traditionally excluded from ethical funds – pornography. A company involvedinpornographyshould,intheory, be easy to spot but, according to Hollands: “It might be that a really big publishing company has a small division somewhere in the world that has a title involved in pornography.”
It hardly needs mentioning that banks are another source of worry for the ethical investor. They have rarely been as unpopular, but we all invest in them simply by having an account. Increasingly though, people are looking for alternatives – six of eight bank brands owned by the big five UK banking corporations have experienced net losses in customers since October 2013, according to the Payments Council. Much of this is due to banking scandals but people are also increasingly worried about how banks use their money according to Fionn Travers- Smith, a spokesman for banking reform campaign group, Move Your Money. “The majority of people don’t really know what is done with their money after they put it past a cashier,” said Travers-Smith. “And it’s made difficult for people to actually find these things out. There’s a massive lack of transparency in the sector in general.”
MoveYour Money’s latest campaign is against the enormous tie-in between the banking and fossil fuel industries. According to their report, in 2012 alone the big five UK banks invested £66 billion in fossil fuel extraction, with HSBC contributing £17 billion, closely followed by Barclays and Lloyds Bank with £15 billion each. And if that wasn’t enough at least four of the major banks have links to fracking, with HSBC, Barclays and Lloyds all directly financing companies involved in the controversial extraction process. All of which may leave the ethical or environmental investor feeling pretty depressed. But take heart – there are alternatives and solutions.
In terms of banking there are the traditional alternatives like credit unions and building societies which give customers more say in how their money is invested. Eight building societies score 98/100 or more on MoveYour Money’s ethical score card. And Nationwide, the biggest building society in the world, also scores highly. There are also more modern ‘ethical bank’ alternatives. MoveYour Money rates Triodos Bank and Charity Bank highest of these, the first providing finance for organisations with a positive environmental, social or cultural impact, and the second lending exclusively to charities and social enterprises. Despite recent problems the ‘original’ ethical bank, the Co-operative, is also recommended due to its strict ‘negative investment screening policy’ and customer feedback. Its ethical policy was recently relaunched on the basis of a consultation with 74,000 customers – a huge number for a piece of market research.
One investment alternative which can provide high yields and positive impacts is the rapidly growing market in green bonds. These bonds, which often fund environmental infrastructure projects that governments are unable to bankroll, have been billed as a way of keeping global warming below 2°C.
As Sean Kidney, CEO of Climate Bonds Initiative said: “According to the International Energy Agency, the money that needs to be spent every year to hit the 2°C global warming target is between US$53 trillion and US$93 trillion. The bond market is worth US$100 trillion.” Green bonds can also offer tax break benefits and preferential rates when linked to government-sponsored projects. This could explain their rapid growth in popularity, which saw the market in green-labelled bonds grow to US$37.6 billion in 2014, a 60% growth on the previous year.
On top of the explicitly green-labelled bonds which fund specific environmental projects, there is also a much wider climate- themed bond market with investments in industries that help fight climatechange.“Ifyouwanttorunaportfolio,”saidSean,“it’snot a small market; it’s a US$500 billion pool.” The majority of climate- themed bonds come from the transport industry where they mostly fund rail projects. The UK is one of the largest issuers of climate- themed bonds with US$58.5 billion, second only to China’s US$164 billion. Now big multinational corporations are getting in on the act too with Toyota issuing bonds linked to electric and hybrid vehicles last year and Unilever issuing bonds linked to waste-reduction projects. Sean expects green bond issuance to continue to grow in 2015. “I think we’re going to get US$50 billion for sure and we’ve got a good shot at getting US$100 billion,” he said.
Another ethical investment alternative is crowdfunding which gives individuals the freedom and control to invest in specific companies or projects that work in line with their values. Certain crowdfunding sites, such as Trillion Fund and Abundance, specifically target environmental projects allowing you to invest in anything from windfarms to community-owned hydro-electric schemes.
Crowdfunding has soared in popularity over recent years with growth of 150% in 2012-13 and 161% in 2013-14, as reported in statistics from innovation charity, Nesta. According to Rebecca O’Connor, Content and Communications Director at Trillion Fund: “Crowdfunding is popular because it offers better returns for customers, it’s cheaper for businesses and it’s an alternative to traditional banks where many people feel they haven’t been getting a fair deal.”
All of which is great, but what if nothing quite satisfies your taste for investment adventure – and security – like a traditional portfolio? Are there ways to navigate the ethical minefield laid down by investment funds? The answer, according to Jason Hollands, is yes and the first step is to understand the issues you really care about. If you’re an eco-warrior into saving the planet but not so bothered about the ethical implications of alcohol or tobacco, understanding this will help you target a fund that fits your ethical views.
The second point is to look at the specific policies of investment funds and how they might evolve. “In many cases the policies of an ethical fund won’t be set in stone for all time,” said Jason, “because, understandably, new issues come to the fore. What approach does that investment fund have to developing its policies over time?” Does it, for example, conduct an annual survey to find what its investors care about? Another thing to look out for, according to Jason, is how much discretion the fund manager has. Some of the best ethical funds have independent bodies which decide ethical policy and have the right to veto investment decisions by the fund manager, thus solving the potential conflict of interests between ethics and investment opportunities.
If you don’t feel you have the time or confidence to do all this research yourself, many independent financial advisors will give advice on ethical as well as mainstream funds. And a few, like the Ethical Investment Association, specialise solely in ethical funds. If you don’t fancy splashing out on financial advice and want the control of deciding for yourself, websites like ethicalconsumer.org and yourethicalmoney.org make the process much easier. Ethical Consumer has a scorecard that ranks the top ethical funds as well as tracking their financial performance. It even has a series of slider scales on environment, animals, people, politics and product sustainability so you can tailor the ethical rankings to fit your views and make the best choice of fund accordingly.
The solutions are definitely out there and in growing numbers. With the right research anyone can navigate the ethical investment minefield and, in doing so, solve one of the oldest ethical dilemmas of all – how to do the right thing and make lots of money.
Banks and building societies
With the joint highest score on MoveYour Money’s ethical scorecard, Triodos provides finance for organisations with positive environmental, social or cultural impacts. It combines high performance with complete transparency and some excellent in-house ethical policies such as a maximum 10:1 ratio between the highest and lowest paid employees and no executive bonuses.
Sharing the top spot on MoveYour Money’s ethical scorecard, Charity Bank lends exclusively to charities and social enterprises, supporting more than 1,000 across the UK. This is a much-needed service as 29% of charities are turned down for loans by High Street banks.
Ecology Building Society
A building society with impeccable transparency, Ecology puts its customers at the heart of its decision making. It also acts as a mortgage provider to many eco-builds, communal housing and restoration projects which are often overlooked by other lenders.
This crowdfunding platform funds environmental projects by offering investors debentures – long-term loans of around 20 years – with fixed rates of interest. With nearly £9m invested by over 1,500 customers it is the largest ethical crowdfunding platform.
This green investment crowdfunder backs similar projects to Abundance whilst offering a wider range of investment types such as ‘peer to project’ loans, bonds, debentures and shares.
This is a not-for-profit crowdfunding platform offering positive social and environmental investments. Customers can invest as little as £1 and can build their own portfolio over a range of businesses and projects, finding the right investments for them by using the Ethex in-depth social and financial profiles.
Ethical investment funds
F&C Stewardship Growth Fund
Started in 1984, this is the first ‘green’ fund and still one of the best. It has an independent ethical committee that includes the Archbishop of Canterbury, Justin Welby, no less.
WHEB Sustainability Fund
One of the only funds by a company that doesn’t deal in other mainstream non-ethical funds. WHEB is a specialist sustainable investment team dealing only in ethical funds. Hence it gets Ethical Consumer’s highest ethical rating.
IS / Co-operative Investments Sustainable Leaders Trust
With one of the best ethical scores from Ethical Consumer as well as being one of the best performers, this ethical fund limits its investments to companies which are likely to benefit from measures taken to improve the environment, human welfare and quality of life.