It might seem like an odd question, asking if one’s ethical investments are ethical, but it’s a fair one. There’s a growing market for ways of investing that are fairer and more sustainable. It’s not a new idea – Friends Provident was set up under Quaker principles in 1832 – but it has grown considerably in recent years. Those wanting to invest with their consciences intact have plenty of choice these days, from current accounts and savings schemes, right up to ethical pensions and equity funds. Recognising the demand, major players have been launching alternative funds of their own, such as HSBC, Zurich and Virgin.
The problem is, there is no agreed definition of ‘ethical’. Does it mean saying no to social or environmentally damaging industries, or actively trying to encourage positive business contributions? Does it mean avoiding companies who have been caught breaking the law? What’s off limits and who decides? And what about corporations with one or two dubious companies in the portfolio – do you have to rule out the whole corporation?
Because there is no standard, every fund gets to set its own rules. So some of them have no qualms about investing in oil and other extractive industries and do so freely. Some will choose the best of the oil companies to invest it – BP or Shell rather than Exxon-Mobil. Others consider the oil industry entirely out of bounds because of climate change.
The Church of England is a good example of this confusion. It has considerable investments and fairly detailed ethical principles on many topics, including climate change, but their single biggest investment is in Shell and it holds £200 million in oil companies. This is a source of considerable unhappiness for some within the church. That’s for the church to work out for itself, but it’s more of a problem when it’s a group that is trading on their ethics as a selling point. If you put your money into the Virgin Climate Change Fund, for example, you might be disappointed to find that the fund has investments in British Airways and BP.
Virgin can do this because their climate fund is built on a ‘best in class’ basis. This means that rather than excluding whole sectors, they seek to encourage best practice by investing in those that are doing the most to cut their carbon footprints, within their own industry. So British Airways isn’t there because it’s not harmful to the environment, but because it’s better than other airlines. Whether you think this is a valid approach or not is down to you and your own standards.
The same goes for banks, and supermarkets, and even the arms industry. I read recently that the Ethical Investment Research Centre offers advice to those setting up funds, and they don’t consider anything entirely off-limits except child labour and tobacco. That was in the Metro and I can’t confirm it, but I hope it’s false. That would imply that your ethical fund could invest in cluster munitions as long as they’re not made by children.
The reason companies invest in big corporations is obvious – you get a pretty much guaranteed return from an oil company or a global banking corporation. Aiming to support socially and environmentally positive businesses is harder work and the returns are often smaller, although not always – there isn’t necessarily a trade off between ethics and profits. Like any sector, there are high performing ethical funds and those with lower returns. Others insist that profitability shouldn’t be the only factor in judging performance, although that doesn’t cut much ice in business.
Should you be interested in genuine ethical investments, you would ultimately need to check the exact policies and approach of each group you were considering. And you can read around and get some advice. Ethicalconsumer.org have a comparison of various funds, and Which? have a useful guide.