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Morality play

22 December 2015

Ethical investing is not just for Ethical funds, but when choosing which companies to exclude, the devil is in the detail.

Far from being a recent innovation, the concept of ethical investment is as old as money itself, and even group-based ethical investment decisions have centuries of heritage.

In the eighteenth century, the American Quakers (or ‘Society of Friends’) were notable for forbidding members from investing in companies that traded in slaves, while the English Methodist preacher John Wesley intoned against investing in companies whose production methods damaged their workers’ health.

In recent years, the growing focus on morally-sensitive investment has led to the creation of a number of funds specifically earmarked as ‘ethical’. These offer investors the chance not just to entrust their investment decisions to a professional, but also to ensure their moral priorities are adhered to.

The St. James’s Place Ethical funds were launched in the late 1990s. Jamie Cumming of Aberdeen Asset Management, who today manages the strategy, says that the emergence of such funds on the marketplace has taken place in response to growing demand.

“We have offered socially responsible investment products for a number of years in response to demand to avoid certain activities in the market,” says Cumming.

Aberdeen’s approach does not involve ranking all listed companies in terms of the ethics of their industry and practices. Instead, certain investments are simply ruled out from the start – a process called ‘negative screening’.

“The ethical approach has nothing to do with the quality or investment suitability of a particular stock,” says Cumming. “Negative screening only reflects the particular ethical considerations of the client. Some names will be screened out, meaning that we need either to find a replacement for a name that has been excluded on ethical grounds, or we need to overweight the portfolio to accommodate the exclusion.”

Cumming says that a given fund might have as many as 15 negative screens – all are treated as equal.

Not just for ethical funds

While there has long been a focus on ‘sin stocks’ (gambling, pornography, tobacco et al) and on defence companies, investors today are concerned about an increasingly wide range of live issues, from environmental degradation to animal rights to developing-world access to life-saving drugs.

This can make it hard to find one-size-fits-all solutions, but the diversity of ethical priorities does not mean ethical considerations need to be limited to ‘ethical funds’.

Thus many managers of more traditional funds have signed up to the United Nations Principles for Responsible Investment (PRI) initiative – the scheme’s six key ethical principles include a range of environmental, social and governmental concerns. In 2006, the assets under management of all signatories to the PRI was $4 trillion – today that number is $59 trillion.1

Ethical funds have been important in beginning to reshape the investment universe, creating new market-based pressures on corporate behaviour. Such funds remain well-placed to offer investors a high degree of selectivity over what to avoid. But a fund need not be earmarked as ethical to incorporate ethical priorities in its investment choices.

“Whilst our fund is not an ethical fund by classification, every stock is rated based on environmental risk, social impact and governance risk,” says Hamish Douglass, manager of the St. James’s Place International Equity Fund.

“The risk rating of a company is a very important component of our investment process. There are selective companies and sectors that fail our risk ratings or our risk tolerance for the strategy. For example, we do not invest in energy, mining, tobacco or casino companies,” he says.

In the long run, a company that ignores ethical criteria may begin to suffer an adverse effect on its profitability and stock price. As Douglass suggests, bad behaviour can ultimately pose a risk to the stock price.

Investors’ ethical priorities will vary as much as their investment objectives, but access to a range of funds makes them all the more likely to fulfil their aims – financial and ethical.

United Nations

Jamie Cumming is manager of the St. James’s Place Ethical Fund. Hamish Douglass is manager of the St. James’s Place International Equity Fund. The opinions expressed are those of Jamie Cumming and Hamish Douglass and are subject to market or economic changes. This material is for information only and is not a recommendation or intended to be relied upon as a forecast, research or advice. The views are not necessarily shared by other investment managers or by St. James’s Place Wealth Management.

Please be aware that past performance is not indicative of future performance. The value of an investment with St. James’s Place may fall as well as rise. You may get back less than you invested. Returns on equities cannot be guaranteed.

Some of the products and investment structures documented within this article will not be available to our clients in Asia. For information on the funds that are available please get in touch.


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