The first ethical investment fund was launched in 1984 by Friends Provident, driven primarily by the fact that they began as an organisation serving the Quaker community. Since then, the ethical investment market has continued to grow.
Generally speaking, these funds fall into two categories – social responsibility or environmental, with some funds aiming to satisfy both social responsibility and environmental mandates.
Most funds are administered by first applying a negative screening program. This excludes potential investments that do not meet the ethical criteria for the fund. Some funds apply only positive screening, which identifies suitable investments on the grounds that the underlying company contributes positively towards the ethical criteria.
To demonstrate the difference between negative and positive screening we could look at shares in the oil company BP. If a fund operates negative screening against companies which damage the environment, BP is likely to be excluded as a potential investment. On the other hand, if a fund operates positive screening it may accept BP on the grounds that it funds significant research into cleaner energy sources. This is an extreme example, as it is unlikely that BP would be held in an environmental fund, but it helps to illustrate the two screening policies.
Ethical Screening is an external organisation that provides information on retail collective funds available in the UK which have an ethical, environmental or responsible investment approach (https://www.ethicalscreening.co.uk/). In addition to our own analysis, we use Ethical Screening in our research.
Mearns & Company operates a panel of funds in which we have absolute conviction. Part of our own screening process for any fund is to ensure that the manager operates responsibly and ethically in their day to day activities. However, the majority of funds are not subject to strict ethical mandates.
Although there are many funds which have ethical mandates, we believe that only a small number of these funds are suitable for our clients based on the following criteria:
Of these, we feel that risk management is critical since many of the traditional defensive holdings in a portfolio, such as shares in tobacco and armaments companies, are not available to the ethical fund manager. For this reason, ethical funds typically display higher volatility and fall in value more quickly when stock markets are in decline.
Using our screening process and asset allocation models, we feel that we have selected a range of funds which can moderate risk and meet our clients’ ethical investment criteria.
It is important to understand that placing ethical restraints on your investments may have some implications:
If you are prepared to accept the above implications and would like us to apply an ethical mandate to your investments, please contact us to complete the Ethical Investment Questionnaire