Ethics
might sound like a much-maligned county adjacent to London,
but it’s becoming an increasingly important issue for
investors in determining where they choose to place their
money.
With corporate social responsibility moving up the agenda,
investors balk at placing their money in any company they
believe is not being managed correctly. Witness the recent
example of BP, whose share price has languished though oil
has steadily neared the $100 per barrel level, due partly
to its tarnished record on safety and environmental issues.
This is not to say that investors are solely motivated by
altruism – divergence from high standards is also costly.
BP received a $373 million fine from US regulators for the
fatal Texas City refinery explosion and oil spills in Alaska,
and last month drug maker Merck agreed a $4.85bn settlement
to end thousands of personal injury lawsuits related to a
best-selling painkiller.
“More attention is paid to detail when people start
losing money,” observes Ketan Patel, an analyst for
Allchurches Investment Management Services. Companies also
need to be more socially aware as they become more international,
he adds, with many setting up overseas units or sourcing products
and services from around the world.
“Pension fund managers are in a position to use their
investment as leverage and actively engage with the company’s
directors where they believe an inappropriate policy is being
pursued,” says Patel. “But for many fund trustees,
the sole mandate is still to get the very best returns available.”
Charities’ interest in ethical investment has steadily
increased in recent years – as has the awareness of
donors. More are ready to ask for details on which areas their
favoured charity invests in, and their giving may be contingent
on this information proving to their satisfaction.
But are charity trustees reviewing their own ethical stance
in response? According to Neville White, who manages the socially
responsible investment (SRI) unit of CCLA Investments, there
has been a noticeable increase in pressure over the past five
years for charities to demonstrate that fund managers can
deliver on the SRI policies they have developed.
Opinion divides on whether this pressure is proving effective.
In October, FairPensions released its Fund Manager Transparency
and Engagement Survey, which found that 15 of the UK’s
top 20 fund managers failed to disclose responsible investor
policies addressing environmental and social issues, such
as climate change and human rights, or corporate governance
issues. The top 20 collectively manage £7 trillion on
behalf of their clients, including charities.
Goldman Sachs and State Street fared worst in the survey,
but familiar names such as Scottish Widows and Barclays Global
Investors also came out poorly. Only five fund management
companies were found to publicly disclose a detailed policy
covering environmental, social and governance issues; led
by F&C (which scored 100 per cent), Hermes, Morley and
Insight.
FairPensions commented that while groups such as Barclays
and Scottish Widows issued public statements on their own
climate change policies and carbon emissions reduction plans,
there was no evidence that they encouraged companies they
invested in to pursue similar policies. By contrast, F&C
and Insight clearly outlined how they engage with companies
in assisting them to reduce their carbon footprints.
It is perhaps no surprise that F&C should receive high
marks. Its F&C Stewardship Income Fund, which marked its
20th anniversary in October, was the pioneer in the ethical
investment field and its fund managers were mandated to focus
on companies that made a “positive contribution”
to society and avoid any involving pollution, pornography,
gambling, armaments, tobacco and alcohol.
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Second-guessing
Despite the FairPensions survey findings, CCLA’s White
believes that it is inaccurate to suggest that charities
are failing to meet their ethical objectives due to fund
managers’ inability to perform. He suggests that,
too often, the charity trustees fail to fully review their
ethical investment policy and to present it to the fund
manager with clear targets for achievement.
“It’s not for the fund manager to second guess
what is best suited to that charity,” he says. “The
investment policy has to be both developed and ‘owned’
by the trustees in order for the fund manager to be able
to deliver.”
This clarity is particularly important when markets enter
a period of volatility and there is a tendency for investors
to switch their holdings into ‘defensive’ sectors,
such as tobacco and alcohol. These, along with gambling
and defence, may be sectors some charities wish to avoid
while others are less concerned.
The investment decision is not always obvious, adds White.
For example, a cancer charity would be unlikely to invest
in tobacco, but face a more difficult decision in deciding
whether to avoid drug firms involved in animal testing,
as one could ultimately provide a cure.
Rather inconveniently for the ethical cause, the FTSE4Good
index – which includes the ‘saints’ of
the FTSE 100 such as companies in the financial and telecoms
sectors – has been decisively outperformed by the
‘sinners’, such as mining, defence and tobacco
firms.
However, as pensions analyst Alex Davies of Hargreaves Lansdown
observes, this picture changes outside of the FTSE 100.
Many ethical funds have enjoyed good returns in recent years
by focusing their investments in small to mid-caps, which
have generally outperformed the market heavyweights. Although
they were hit by the volatility caused by last summer’s
credit crunch, most have rallied strongly.
His firm singles out the ‘granddad’, F&C’s
Stewardship Income Fund, as a strong long-term performer.
He also cites Aegon Ethical Equity, which targets UK growth,
has strict ethical criteria and has done well compared with
its peers, and Jupiter Ecology, a global fund focusing on
‘green’ companies that also reflects an ethical
bias. Hargreaves Lansdown’s own website offers the
ability for investors to define their required portfolio
by ticking a series of boxes that reflect their ethical
criteria and selects those funds that are suitable.
Emma Howard Boyd, Jupiter’s head of socially responsible
investment and governance, says the recent good performance
of smaller and mid-cap companies developing green products,
services and technologies has helped to fuel interest. It
also provides reassurance to charity trustees who, mindful
of their fiduciary duties, are looking for funds that can
demonstrate a strong long-term performance in which they
can invest with confidence.
Jupiter’s focus is on the environment, where regulation
is increasing and companies are making a conscious effort
to reduce their carbon footprint and develop greener operations.
Boyd believes that the importance of environmental issues
can only grow over the long term and, as more businesses
seek to improve their green credentials, more will become
eligible for the ethical investor’s portfolio.
A missing link
Despite the growing interest in ethical investing, many
charity trustees neglect to check their portfolios, or review
the level of support and service provided by investment
managers in implementing ethical mandates, according to
SRI investment and analysis firm Ethical Screening. Its
director Lee Coates says that too many pass on the responsibility
to the fund manager, who may readily agree to take it on
without actually having the mandate to do so.
“Those trustees who do recognise that the responsibility
lies with them haven’t been able to easily monitor
the companies in which they invest,” he says. “But
they can now screen them and check how they shape up on
the issues relevant to their charity.”
The firm’s service, which he describes as “one
of the last missing links” and is free to charities,
provides ethical screening of the top 350 UK companies.
It went live at the beginning of October. “We notified
charities of the launch through a general mailing and already
25 per cent have taken up the invitation to register, which
is a pretty strong response rate,” says Coates. “Quite
a few charities – a large number of them faith groups
– are already using it and it would certainly make
life easier if we could convert more.”
It should be added, though, that charities whose investment
portfolio extends beyond the UK stock market don’t
yet have such a readily available screening service.
As Henry Boucher, a director of Sarasin Chiswell notes:
“It’s a fairly easy list to identify for UK
equities – but many charities have pooled funds for
other assets such as international equities and bonds, where
you can’t easily look through.”
He suggests the best solution for charities is to seek out
fully sustainable equities and bonds or a Common Investment
Fund (CIF), which has ethical restrictions and is far easier
to screen.
And he adds that, with the world clearly still on an unsustainable
path, there is another issue that should be recognised.
“Trustees have a duty to think long-term and consider
the beneficiaries in many years’ time.
“Climate change seems likely to make a big difference
and they should be ready to take account of it in their
investment policy through specialist investments.”
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