Guest post – millennial Charlotte Merriman – ‘struggling with a headwind of student debt, living and loving my life, passionate about FIRE’ (Financial Independence, Retire Early)
It seems that we younger investors are more inclined to question the environmental and social impacts of companies we invest in than perhaps our parents may have been; we are concerned about issues such as climate change and human rights abuse, and will invest elsewhere should a company be in any way implicated.
In the spirit of supply and demand, younger investors are now being tempted by a growing number of ethical funds that aim to reassure us that they have done the quality control and stripped out any rogue companies leaving portfolios that should appeal on moral grounds whilst delivering the returns that all investors seek.
I suppose it should come as no surprise that the US led the charge in creating ethical funds; the Global X S&P 500 Catholic Values ETF and James Biblically Responsible Investment ETF even invites the question ‘What would Jesus do . . . in the stock market’
ETF provider Lyxor allows investors to adopt a slightly smug expression when piling in to its ‘global gender equality’ fund and a number of ETFs promote water sustainability around the world.
What would Jesus do . . . in the stock market
Such funds are created with environmental social and governance (ESG) screens and offer portfolios of global stocks whilst excluding, for example, arms manufacturers and those that invest in the gambling industry.
However, there is no agreed definition of what constitutes ‘ethical’ and millennials determined to invest according to their moral compass need to check the construction of their ethical fund carefully before committing; some funds will adopt a basic strategy to remove companies with large operations in industries deemed unethical, such as tobacco, weapons or gambling, whereas others may seek to reward better behaviour or innovation by favouring stocks with better ratings than their peers according to certain criteria.
What may be considered ethical by one product manufacturer may appear complete anathema to another; before taking the plunge, make sure you understand the index construction and screening that is applied in order to understand what will and won’t be included in your fund portfolio.
A good example is the iShares MSCI Emerging Markets Socially Responsible Investing UCITS ETF; promoted as a sustainable fund, investors may be blind-sided by the fact that it actually holds four oil stocks within its portfolio.
The issue is not with the fund, it is only following the rules of its benchmark; the problem lies with investors’ definition of ‘ethical’.
To some, the inclusion of any company associated with fossil fuels or arms would make it an absolute no-no; But what about denying Facebook your investment as punishment for harvesting, and selling, your data? What about the seemingly numerous sportswear companies exposed for perpetuating child-labour and sweatshop conditions in the Far East?
what about denying Facebook your investment as punishment for harvesting, and selling, your data?
So maybe rather than just being ‘acceptable’ according to our beliefs, should ethical or sustainable investing mean diverting money towards companies that are proactively delivering change such as renewable energy or clean water initiatives?
Investors determined to ‘do good whilst doing well’ will need to do their homework when it comes to really understanding the ambitions and machinations of funds variously promoting ESG investing, socially responsible investing (SRI) or impact investing.
There are a wide range of ETFs that support socially sustainable investing, and Dominique Riedl of justETF takes closer look at how portfolio choices can do the power of good to the environment and society as well as our personal wealth – more
It is not always easy to compare apples with apples, but unless you really look under the bonnet you could end up with a portfolio featuring things you really didn’t want to own.
An example of selection by ranking is that of UBS’s MSCI EMU Socially Responsible ETF; the index it uses ranks companies based on data points such as corporate governance and accounting practices, but because it scores well against these metrics the largest holding of the fund is Total.
However well run it is and diverse its board, there are those that will feel very strongly that a giant oil and gas company, with its inevitable impact on the environment, should have no place in an ESG fund.
Some funds may lower the weighting of a stock in its portfolio based on where its earnings come from, but might not exclude it entirely; not every investor has the same definition of what is harmful.
When you really start to scrape beneath the surface there are just so many shades of grey; what really constitutes exposure to tobacco, and where does vaping fit in?
Current bête noir on the high street are betting shops that target those less affluent with highly addictive fixed odds betting terminals; most would agree that companies that profit from such pernicious ventures should find no berth in an ESG fund, but what about traditional broadcasters that offer betting products late at night?
millennials were twice as likely as the overall investor population to invest in companies targeting social or environmental goals
A YouGov survey found that millennials were twice as likely as the overall investor population to invest in companies targeting social or environmental goals; 13% of 18-34 year-olds with a pension said they wanted that money to be invested ethically, whereas only 6% of those aged between 45 and 54 felt the same way.
Millennials do want to use their money for good and ESG funds can be a good option, but finding companies that are truly free from controversy is tricky; so called ‘big tech’ has been punished since late 2017 when a raft of ethical funds kicked out Facebook, months before the high-profile data breach came to light.
Index provider MSCI had been concerned about Facebook’s governance and privacy policies since 2012, and in March 2018 said it had ‘called attention to the firm’s poor privacy and data security management practices’ noting the company scored ‘poorly on management indicators with regard to controls over user data sharing with third parties, data collection minimisation practices and audit oversight’; Facebook later said it was overhauling its policies on privacy and personal data.
gives you a fighting chance of achieving a decent return on your investment – without costing the earth
Another option when it comes to ethical investing is to pick a fund with a specific theme such as Civitas – a social housing real estate investment trust (REIT) which supports UK social housing projects, or one that invests in renewable energy projects.
The Social Stock Exchange was established in London in 2013, with a mission to create an efficient, universally accessible marketplace where impact investors and impact businesses of all sizes can come together; impact investing is a dual mandate approach to investment – investors don’t just want a financial return from the businesses that they invest in, they want to see a positive social impact too – more.
Each of these funds will have an individual take on why it is more ethical, more sustainable and the most searching in pursuit of good governance; as an investor the key is to be able to see beyond the extravagant claims and worthy words to ensure that the fund you choose is in line with your particular take on what is ethical and what makes a positive social impact, and then ensure that it gives you a fighting chance of achieving a decent return on your investment – without costing the earth.