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Emma Simon: Getting clients engaged in ethical questions


What are the main questions you ask any prospective investor? I am assuming that age, current financial position and attitude to risk will be key – but how many advisers ask about their ethical outlook?

At the moment you are unlikely to be in breach of any FCA-mandated regulation for failing to identify whether investors want their retirement fund invested with arms manufacturers, tobacco companies or even, God forbid, payday lenders.

Recent events have highlighted how complex this whole area has become. Even the terminology is less clear. Once there were simply ethical funds, whose remits were largely dictated by the religious conviction that you shouldn’t profit from the wages of sin, be it gambling, alcohol or sex – at least video and magazine depictions of it.

Today, the term ethical investing has largely been dropped – probably because it sounds rather preachy. Instead we have socially responsible investment which targets companies with good environmental and social governance.

With the internet is awash with pornography, and the middle-classes getting sozzled on Sainsbury’s sauvignon blanc five nights a week, it’s not surprising that your average investor isn’t too bothered with these traditional ethical funds.

But we have replaced one set of anxieties with another. I’m sure I’m not alone in feeling a pang of guilt when I’ve driven to the supermarket rather than walked, then discovered I’ve left the hessian bag for life at home, again.

You might not want a wind turbine right next to your garden, but many of us are now far more environmentally aware. And more people want their investments to reflect these concerns but they also need a decent return on their money.

To date this hasn’t always been possible, but many of these newer SRI-mandated funds have better track records. Seven out of eight Alliance Trust funds, for example, have outperformed their peers and most now rightly benchmark themselves against mainstream indices.  

That means many of these “green” funds still invest in large oil companies. But there is increased focus on putting money with companies that are less wasteful with our natural resources as well as supporting those that are developing more sustainable ways to generate electricity – be it biomass fuels, hydro-power plants or offshore wind farms.

Many SRI managers will argue that this doesn’t just make environmental sense, it’s good business sense too. Legislation is likely to penalise companies that are big polluters or have supply chains that exploit overseas workers, for example.

Companies that are more energy efficient are likely to have a tighter control on costs, potentially making them more profitable.  

There will be many companies that lose money in the nascent renewable energy market, no doubt exploiting whatever tax-breaks and subsidies are offered on the way. But there could be a real investment opportunity for those that get it right. After all, energy demand is only going one way and even with all that shale gas under Blackpool, it looks likely there’s only so much we can burn before we fry the planet.

This isn’t going to happen in the near future and probably not before our pension pots are long since spent and we’re fossilising ourselves. So why should advisers bother with such issues? Many of their clients may think this global warming is a load of cobblers anyway.  

However, if you can get clients engaged and interested in where their money is invested, whether its solar power or Paddy Power, it’s my hunch that they’ll stay customers for longer. I’m also pretty sure that it will only be a matter of time before this type of questioning is required anyway.

Emma Simon is a freelance journalist


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There are 11 comments at the moment, we would love to hear your opinion too.

  1. Emma, I think you are right. Ethical questions are becoming more important for investors and regulators are considering making it compulsory to discuss them with clients.

    And not ignoring the possibility of changing legislation in relation to the environment could mean putting client’s at risk. Many mainstream resource companies that will be big holdings in client’s portfolios could be overvalued:

  2. I want to invest my money in any company that will agree to knock down wind turbines, unless they are in my MPs back yard.

  3. Oh dear back to this interminable and boring dialectic.

    When will the luvvies and the do gooders finally recognise that Ethics, when considering investments, is an opinion? Also it is hard enough trying to make money for clients without having one hand tied behind your back. If it’s legal it’s ethical.

    I have been advising since 1985 and ‘Effics’ has only been raised on two occasions by clients. I certainly won’t raise the topic. Things are confused and difficult enough for clients as it is. On both occasions a quick conversation has shown that the client is misguided.

    Ok so you don’t want to invest in armaments. Taken logically therefore you are prepared to put workers in Wharton on the dole. The contract would be given to France, Russia or Italy anyway – so all you will have achieved is misery in the UK.

    Wind farms – even the jury is out in Parliament – and do they make any money? Global Warming has now been renamed Climate Change. Even that is debateable. Climate has always changed. The Vikings invaded Northumberland to access (amongst other things) the vineyards there. The Elizabethans held fairs on the frozen Thames in London. This latest mantra actually doesn’t benefit the UK that much in comparison with the potential benefits in more southern latitudes, where they do a lot less (or even nothing). So we end up paying higher tariffs for the benefit of those elsewhere. Anyway I rather like the idea of growing bananas in my garden. After all the UK is inexorably progressing towards Banana Republic (or in our case Monarchy) Status.

    I appreciate that some will have a social conscience – in which case if you are making profits – take some and give it to charity – provided that the charity concerned isn’t wasting your money on high salaries and corrupt foreign governments.

    Anyway define charity. Isn’t it the process whereby the better off help the less well off. Now define taxation……………..

  4. @Emma – I asked NEST about this as while they offer two supposed “Ethical Funds”, most clients believe that ALL funds managers adhere to the UN Global Compact which is a pretty basic list of what one might say would apply under English Law. At the moment I believe a consumer has to “opt in” to an SRI fund which meets the basic of the UN Global Compact when in reality, it should be the reverse.
    I’ll email you the response I had from the Chief Investment officer of NEST if you like.
    We have a standard questionnaire we ask all clients now so we can gauge what they want to avoid and trigger a discussion of Ethical or SRI investing. This way, when someone makes a decision, they make it consciously knowing what we are NOT screening for if they say no screening please, which is their right.

  5. My father has more than once said that he wishes an investment firm would launch an Unethical Fund which would invest solely in:

    -energy companies that actually produce energy as opposed to subsidy scams

    and the like. He believes (and I am inclined to agree) that it would have outperformed almost every other investment over all time periods.

  6. @Sascha K

    In fact your Dad is quite right. I too have been hoping for this for about 20 years now, but no UK fund manager has the balls.

    There is a Vice fund in the US and it has done very well indeed. Year to June 30th +22%. 10 year +10.54% compound. Even since 2008 (5 yrs.) it has produced 8%. The top ten holdings are all consistent money makers. Tobacco (several different firms), Gambling, Booze and Weapons. Can hardly go wrong can it? A real shame that we can’t access this fund. It even has an ETF option.

  7. @Harry: How nice to have my / our prejudices confirmed. I think I’d actually heard of the Vice Fund and you’ve dredged it from the bottom of my memory. A shame that it can’t be accessed here.

    Whichever fund manager does find the balls to launch one is going to make an absolute mint. Look at any remotely decent newspaper:

    -The craze for subsidising wind / solar has died down, and it is now recognised that shale gas is the long term solution. (The noise produced by the rent-a-mobs, fresh off the coach from Dale Farm, notwithstanding.)

    -The Archibishop of Canterbury has withdrawn support for the RSPCA as Mrs Miggins has gradually realised that her donations are not being used to rescue stray kittens, but to persecute farmers and pet-owners like herself. (The kittens? Quietly gassed.)

    -People are deserting the mega-charidees in their droves as they want to see funds go to people in need, not chief execs on £300,000 a year salaries ‘commensurate with the private sector’. Not to mention the spam.

    Humanity is sick to the back teeth of the holier-than-thous. If there has ever been a better time to launch the Unethical Fund, I’d love to know when it was.

  8. Maybe it’s largely a generational thing as I can identify with the author and I’m her age (unless the photo is very old!).

    I don’t see attitude to ethics being much different to attitude to risk, the only difference being that you can fairly assume a default position for the former. If I expressed a wish to invest in a certain way and I got these kinds of tirades from an adviser who has a different political view, they’d quickly be told to do one.

    P.S. Harry – “some will have a social conscience”? No, we all have one, there are just different degrees of how much you care about how your actions impact others. Look deep into the dark, black abyss for that one time you once helped someone for no personal gain…..

  9. @ Anon 4.46

    Unlike you I am not ashamed to post under my own name. You have entirely missed the point (as so many tree huggers do).

    When I work – I work for money. That doesn’t mean that I don’t help people for no gain – nor does it mean that I don’t give to charitable causes. But at work it is for remuneration – otherwise why turn up? If you are employed I don’t think your boss would take very kindly if you worked (in his time) for nothing.

    As for social conscience and how my actions impact on others. My social conscience ends with friends and family – for the rest it is quite simple – do no harm. That doesn’t necessarily mean running around trying to do good. I leave that to social workers. (Who from what I have read don’t have a very good record).

    Finally I don’t have a deep dark abyss. My conscience doesn’t trouble me and I don’t have to run around with my heart on my sleeve to convince myself or others that I am an OK bloke. I don’t have aspirations of sainthood.

  10. Ignorance is bliss.
    In the UK, the things listed below are pretty much illegal and yet if a client is NOT being asked these questions, so fund manager will not be checking whether these issues are being avoided.
    Personally I have no problem with alcohol production, nor tobacco production (I am a non smoker though). Child labour is not as simple as avoiding it, but to alleviate the need for it is quite simple.
    Human rights
    Businesses should support and respect the protection of
    internationally proclaimed human rights; and
    make sure that they are not complicit in human rights abuses.
    Businesses should uphold the freedom of association and the
    effective recognition of the right to collective bargaining;
    the elimination of all forms of forced and compulsory labour;
    the effective abolition of child labour; and
    the elimination of discrimination in respect of employment
    and occupation.
    Businesses should support a precautionary approach to
    environmental challenges;
    undertake initiatives to promote greater environmental
    responsibility; and
    encourage the development and diffusion of
    environmentally friendly technologies.
    Businesses should work against corruption in all its forms,
    including extortion and bribery.
    These are the 10 Principles of the UN Global Compact. They are pretty basic they don’t remove many equities as a result of using these screen, so why isn’t it used as the starting point for ALL NEST approved funds instead of NEST just having an “Ethical” fund which is too strict/dark green for my needs and a Sharia Fund, which is not actually that sharia compliant anyway, it’s just a tracker!

  11. Oh yes as an example, Vanguard’s SRI European Stock Fund avoids the issues I listed on the UN Global Compact and instead of holding the 499 FTSE All-World Developed Europe Index holds 455 stocks. It’s one year performance to July 2013 was still 30.47% net of expenses, with a TER of only 0.35%, significantly lower than most other European trackers and only .1% higher than Vanguard’s non SRI fund (which is ex UK) which over the same period returned 35.87%. The Vanguard FTSE U.K. Equity Index Fund achieved 24.23% over the same period, whic tends to suggest the only reason the European SRI fund did worse was because it had UK equities in it, NOT because of being SRI.

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