Why it is hard to be a saint in the city
Greta Thunberg’s speech at the UN’s Climate Action Summit last month stirred a lot of the world’s views about the environment and this is creeping more and more into our everyday lives.
I saw one headline last week stating that “climate change is the most serious issue for the majority of voters” but notably it added that these same voters are reluctant to meet the cost of tackling the crisis.
As a financial adviser, I must say my experience is that investing and ethics typically don’t go hand in hand. I must, however, add there has noticeably been more of a focus on socially responsible investments (SRI) from my clients in recent times.
Socially responsible, or ethical, investing is the practice of selecting investments based on ethical or moral principles. Companies that are involved in activities that are considered unethical are typically in the alcohol, tobacco, gambling, adult entertainment or weapons industries.
These are known as “sin companies”. Ethical investments tend to exclude “sin” stocks, as those companies are thought to be making money from exploiting human weaknesses and vices. It’s surely a sign of the times that ethical investments, which was once laughed off by some as the practice of naive do-gooders, now make up more than 25% of all professionally managed investment assets.
But, is socially responsible investing really what it seems? Every company will say it is socially responsible but when you look under the bonnet sometimes it seems more than a little grey.
What, exactly, are companies who are considered to be socially responsible doing?
One example would include them reducing the carbon footprint — known as credits — to mitigate climate change. The Collins English Dictionary defines carbon credits as a certificate that a company has — possibly paid for — to have a certain amount of carbon dioxide removed from the environment.
Some people question the ethical perspective behind carbon offsets. Are businesses simply avoiding the real issue — the damage they’re causing by paying their way out by buying carbon credits, effectively neutralising their negative effect on the environment. It makes it OK to do wrong as long as you pay for this harm, without truly undoing it.
The advice I would give to any SRI investor is to check the screening criteria for the SRI funds that you are considering. If you don’t you could end up with companies that don’t represent your values in your portfolio.
Royal Dutch Shell — or Shell Oil to you or I — for example would have appeared in one of Ireland’s largest ethical funds up until February 2016 despite being one of the world’s 10 biggest carbon emitters. Since 2016 the fund removed all fossil fuel companies but how would you have felt if you had seen this company — and other polluters — as the largest holdings for many years after the event.
Given the low returns available on deposits, more and more first-time investors are coming into the market. This has led to more and more appetite for socially responsible funds.
Notwithstanding, we all want to make money from our investments, regardless of our values. So the real question is does investing ethically mean you must give up on your returns?
Social responsible investment fans argue that it’s possible to do some good while making money. Their argument rests on the idea that socially responsible companies are likely to be well managed because their underpinnings are based on solid values. Sin stock fans argue that SRI mandates pass up good opportunities in companies that have strong fundamentals, thus trading away profits for a feelgood factor.
The sin stock crowd feel their investments deliver solid returns and believe it is better to back industries that meet consumer demand than for them to starve for their convictions. One issue I would have with SRI funds is they tend to be higher risk.
This is due to the fact that they are not as diverse as a typical fund, as they exclude some of the market. It is like saying to a client ‘would you invest in companies where they only begin with the letters A-M instead of A-Z?’.
A closer look at the forces that have driven sustainable investing over the past decade suggests the trend will continue. I am not promoting or condoning SRI funds but if you’re just looking to make a solid investment, moral convictions aside, a diversified portfolio including both saints and sinners may be the best choice.
