In your investment fund ethical or going up in smoke?
One of the recent additions to our shopping centres have been a number of shops specialising in vaping and other ways of helping us to give up ‘the smokes'. Well, the giant insurer Axa has gone off tobacco too.
In May Axa decided to dump its €1.7 billion of investments in tobacco shares and bonds, believing that as a health insurer it should not have anything to do with the tobacco sector.
Amidst a barrage of increasing limitations on how tobacco can be advertised, and reminders that cigarettes are the only legally available product that kills half of its users, you can see that Axa certainly have a point.
Prior to that, the company also got rid of €500 million it had invested in the coal and gas sectors, to coincide with the Paris Climate Change Summit last November when, of course, the topic of fossil fuels was high on the agenda.
But you don't have to be a global insurance company to take an ethical or pro-environmental stance with your money.
Let me introduce you to ‘the ethical investment fund'.
According to latest figures from the ethical investments research company EIRIS, at the start of this year there were 83 UK investment funds focussed on ethical investing.
Ethical investing is a specialised part of the funds sector, but is increasingly in demand. In fact, the amount of money invested in those 83 green and ethical UK funds reached over £15bn in 2015, up from around £6bn ten years before.
Ethical funds invest only in companies that match their ethical criteria. It's an idea that is touching a nerve with more and more of us every year. Each fund is different, but an independent adviser can spring the bonnet and see which companies are in there, before you decide which fund or funds suit you.
The funds base their ethical stance on one or both of the following strategies.
Some funds use ‘positive screening' to include companies that are strongly pro-environment. These include companies which manufacture environmental products, encourage biodiversity, or promote renewable energies.
Other ethical funds use 'negative screening' to exclude companies involved in various sectors often thought of as ‘unethical'. We've already mentioned tobacco; others include alcohol, meat, nuclear power, defence, or intensive farming. They can also avoid investing in companies known to be involved in deforestation, exploitation of workers, or animal testing.
Then there's a second level of fund differentiation. The 83 or so UK funds operate on a sliding scale informally said to range from ‘light green' to ‘dark green', enabling the investor to choose where to position himself.
Here's how it works.
At the light green end of the scale, funds will avoid most of the big environmental sinners named above, but they may permit investments in other controversial non-ethical sectors such as oil and gas, where they deem them to be essential for maximising the return from the fund.
This type of ‘fund with ethical elements' is perfectly legitimate, provided it's made clear to you what investments are in there.
With regard to animal testing, for instance, they might invest in pharmaceutical companies using animal testing to produce essential drugs for the benefit of mankind – and exclude only those companies using animal testing for non-essential products, such as cosmetics.
Nuclear power industries may also feature, the fund manager taking the view that nuclear power is preferable as a modern alternative to pollutant fossil fuels.
Funds at this end of the ethical spectrum are suited to those who want to take a certain, but not an extreme, ethical stand. If you want to go further, then at the other end of the spectrum we find ‘dark green' ethical funds. These may be suited to real ‘hardline' investors who are totally committed to the environment.
In addition to screening out the industries named above using negative screening, and including certain others using positive screening, some dark green funds actively seek out companies which, in the spirit of the grand old Dutch East India company, also try to give something back by improving social infrastructures wherever they manufacture around the globe.
Some provide training to develop their workers. Others fund the provision of clean water, good living accommodation, or quality healthcare.
This is on top of the ethical nature of the products they make, their worker-friendly in-house manufacturing practices, and the industrial sectors in which they work.
Now here's an interesting historical footnote to end on.
The first ethical fund was set up primarily to avoid the defence industries.
The Pax World Fund, launched in the US in 1971, when opposition to US foreign policy was at its height, was principally aimed at people who wanted nothing to do with companies making money out of the Vietnam War.
Today the range of ethical investments is much wider and offers great scope for homing in on the specific issues important to you.
:: Michael Kennedy is an independent financial adviser and pensions specialist, and can be contacted on 028 71886005