Last updated: May 2013
Ethical investment: choosing an ethical provider
New research has found that many ethical investment providers are failing to keep up with current concerns – or often not doing much more than screening out the very worst companies. Campaigning charity FairPensions gives us a preview of their findings.
FairPensions surveyed 20 ethical providers in November 2012, including some of the largest funds in the market. If you choose the ‘ethical’ option on an individual pension, or indeed an ethical unit trust, it is likely that your money is with one of the providers covered in this research.
Environmental damage, human rights and labour standards consistently top polls of ethical concerns. Yet ethical investment continues to be dominated by the so-called ‘sin stocks’ of porn, gambling, nuclear, alcohol, tobacco and arms. The pressing issues of today – sustainability and corporate ethics – barely get a look in.
Why are ethical providers falling behind? Well for a start, very few of them bother asking their customers which issues they care about. Only 20% of providers carried out any sort of survey of their customers’ views.
But there is a more fundamental issue. Modern ethical concerns do not fit well with the standard approach to ethical investment of excluding particular companies or sectors through simplistic and easy-to-apply negative screens. Once these ‘unacceptable’ companies have been screened out, most ethical providers see their job as done. However modern concerns tend to be overarching and complex – applicable to many (if not all) sectors and requiring ongoing attention.
Stopping at exclusion alone is an increasingly outdated model. By combining screening with ‘engagement’, ethical investment has the potential to act on the issues consumers care about and help improve corporate behaviour. However two-thirds of providers are not willing to engage with companies on ethical issues.
What is engagement?
Most of the providers surveyed offer equity funds. These operate by buying shares in companies. As owners, they then have the power to control how the company is run. FairPensions (and many others) believe they also have the responsibility to ensure that companies are well run, challenging management when necessary.
Many ethical funds have holdings in large multinational companies. Ethical screens tend to favour big banks and multinational pharmaceutical companies. Many funds also have holdings in supermarkets, oil and gas producers and even mining companies. Although these are often selected on a ‘best-in-class’ basis, as better than the rest of their sector, there are clearly still many issues around business ethics, climate change and supply chains that are widely applicable.
A handful of providers did engage with companies on ethical issues. This included one provider who challenged Tesco on stocking whale meat. Another provider put pressure on major banks to strengthen their safeguards against funding cluster bomb and landmine production.
Even if ethical funds avoid all large multinationals (which hardly any do), there is still scope to make ‘good’ companies better. In fact, with smaller companies, ethical providers can have even more influence as they are likely to own a higher proportion of the company.
One provider engaged with a specialist food company about poor animal welfare standards in its supply chain. The company addressed the issue and put better safeguards in place to prevent a similar occurrence in future. Another provider is in an ongoing dialogue with a manufacturer of electric car batteries. The manufacturer meets all local pollution and waste control regulations, but the provider believes they can do better and is encouraging them to reduce their environmental impacts.
Will ethical investment rise to the challenge?
The ethical market has grown exponentially over the past decade and now controls £11bn of investments. While still small compared to mainstream funds, this should be a vocal part of the market willing to tackle companies about issues that mainstream providers won’t touch. There is a real need for this. Many mainstream providers tend to be conservative about the issues they will act on, only raising issues with companies if there is a direct risk to financial performance.
Perhaps ethical investment needs to re-discover its radical roots. As well as religious-based exclusions, its origins also lie in protests and campaigns from as far back as the anti-slavery movement in the 1700s up to the South African divestments in the 1980s.
Ethical investment needs to innovate and offer forward-thinking solutions to the challenges the world faces. Yet most of the market is stagnating, failing to keep up let alone get ahead.
The best providers show what is possible. Particular credit should go to the Co-operative Asset Management (which manages the Co-op’s investment funds) and WHEB Asset Management. The Co-op has a dedicated ethical engagement policy, developed through consultation with members, which applies to its unscreened as well as ethical funds. WHEB is one of the few truly sustainability funds available in the retail market, focusing exclusively on investing in companies which offer solutions to the world’s problems.
The question remains, will the rest of the market raise their game?
How does your provider score?
Providers were scored on November 29th 2012 on whether they engage companies on ethical issues, their responsiveness to customer preferences and how much information they publish online. The ranking does not include financial performance or fees and should not be taken as financial advice or endorsement of any particular company.
The full ranking is available at www.fairpensions.org/ethicalfunds along with recommendations for each provider about how they can improve.
What can consumers do?
Demand more from your provider. You can email them through the FairPensions website, asking them how they are planning to implement the recommendations.
If you’re thinking about choosing an ethical fund, do your research carefully. Things to look for include the full list of companies the fund holds and their last engagement report.