...

Ethical Investments

Background

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.

Screening

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

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.

Our ethical investment range

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:

  • Risk Management
  • Investment Process
  • Fund Manager Tenure
  • Past Performance

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.

Important considerations

It is important to understand that placing ethical restraints on your investments may have some implications:

  • It may not be possible to access a particular asset class
  • A fund matching your ethical beliefs may not be suitable for your attitude to investment risk
  • Ethical funds may under perform their non-ethical counterparts, particularly when stock markets fall. This means that the chance of capital loss is greater
  • Ethical funds may be more volatile than their non-ethical counterparts

Ethical investment questionnaire

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

Like what you see?

If you would like to talk to us about how we can help you, please contact us

Get in touch