|  Updated: 

Ethical investment funds — not making the grade?

By:

Add as a preferred source on Google
In a previous blog post in November, Klement had noted that companies with better share price performance were more likely to receive a strong ESG rating under MSCI than competitor Refinitiv.
In a previous blog post in November, Klement had noted that companies with better share price performance were more likely to receive a strong ESG rating under MSCI than competitor Refinitiv.

Survey after survey has shown that people want their money invested ethically. But what does that mean? And, crucially, do so-called “ethical” funds provide what savers are looking for, or is there a mismatch here?

Ethically-labelled investment funds have a list of exclusions — various types of company that they will not invest in because they are linked to products and business practices that are deemed unethical.  

LCP recently commissioned a Yougov poll to find out what types of company people wanted to see on those exclusion lists. Weapons came out top, chosen by 59 per cent of respondents, followed by gambling at 57 per cent and tobacco at 54 per cent. Other areas followed some way behind, including GM crops, coal, and alcohol.

But how does that compare with what is typically on fund managers’ exclusion lists? Well, ethical funds universally avoid investments in controversial weapons, like cluster bombs and biological weapons, as well as tobacco.

Some funds go much further, screening out all the areas covered by our survey, and more.

However, some “ethical” funds invest in conventional weapons, gambling, and other sectors that might be seen as morally dubious.

The obvious lesson from this is that savers should check the exclusion list before they invest. But is that realistic or even reasonable? Shouldn’t savers be able to trust that an “ethical” fund meets certain minimum standards? Moreover, savers may not have a choice. Defined contribution (DC) pension schemes typically only offer one ethical fund.

Our survey showed that ethical investing is not just about excluding companies. Savers also want their pension money invested in firms that care about employee wellbeing, the environment and fair trade. They also want investment managers to use their influence to encourage companies to follow good practices in these areas.

While some ethical funds seek out positive corporate practices as well as avoiding the negative ones, not all of them do. Some just apply their list of exclusions and then invest normally in a selection of the companies that are left.

Some “ethical” investment funds are therefore falling far short of what savers want. Bear in mind that our survey asked a random sample of the general public. We would no doubt have seen even higher percentages wanting screens applied to their investments if we had only surveyed people who would specifically choose an ethical fund.  The nuances at play and spectrum of saver views may mean that it is not feasible to set minimum standards governing what constitutes “ethical”. Requiring greater communication of the factors that lead to a fund being labelled as such is, however, achievable.

All stakeholders have a role to play. Providers should review their ethical funds to make sure they are fit-for-purpose. Investment managers should refresh their list of positive and negative screening criteria to reflect modern savers’ preferences. Providers of retail investment platforms and DC pension schemes should ensure their ethically labelled funds are clearly communicated, so that savers know what they are investing in, and consider changing the funds that they offer.

Main image credit: Getty