Brief description of Style
Ethical funds typically consider a wide range of issues – with an emphasis on considering ‘personal values’ related issues. These funds will typically exclude industries or practices that have been identified as being ‘unethical’ (or ‘unacceptable’) and favour companies with higher standards.
Where an ethical fund will and will not invest is set out in their published policies (summarised in fudn criteria). Strategies vary significantly both in terms of the issues considered and the way in which issues are dealt with (the fund’s ‘approach’).
Commonly considered ethical issues include: involvement in armaments and/or weapons manufacture, tobacco, animal testing, alcohol, gambling and pornography. Some funds focus on only a few of these, others consider all of the above and more.
Ethical funds almost always consider social and environmental sustainability issues in addition to ‘values based’ issues – as they are integral to ethical behaviours.
Some funds focus on applying strict ethical exclusion criteria, others are more positively focused and may apply ‘best in sector’ screens – which means some ethical funds can invest in most sectors.
SRI approach applied
This is a broad group of funds which is characterised by their focus on ‘ethical’ or ‘values based’ issues (which funds in other SRI Styles may ignore).
Some funds will aim to apply ‘absolute exclusion’ criteria. Others may allow some involvement in excluded areas as absolute avoidance can be problematic for larger companies – for example 5 or 10% of annual turnover. Where a limited involvement is allowed, this is often referred to as having a ‘de minimis’ limit or ‘tolerance’.
These funds generally have some form of ESG (environmental, social and governance) integration strategy that aims to exclude companies seen as presenting high ESG risks – as well as responsible ownership strategies – which aim to encourage higher standards. The extent to which these impact stock selection (and ownership strategies) varies significantly.
Some of the funds in this group also have a significant emphasis on helping to deliver positive impacts and outcomes – although again, this varies. (See fund filters).
See ‘Policies’ and ‘Features’ filters for further information.
SRI issues covered
Ethical funds generally research the positive and negative aspects of a wide range of issues including some or all of the following:
The sectors that are most commonly excluded are tobacco and armaments manufacture.
The defining features of these funds is that they consider ‘ethical’ or ‘values/principles based’ issues as well as social, environmental and governance issues.
Variation across Style segment
The number of issues covered, behind the scenes activity and the depth of research employed varies across this group. Resources levels and commitment to engagement also vary. Although most fund managers make use of external research, some funds are supported by significant in-house resources, whereas others are not.
Impact on investment strategy
Some ethical funds invest in most sectors whereas others are more restricted.
Larger sectors that these funds typically avoid or are underweight in are oil and gas, pharmaceutical and tobacco companies – however strategies vary.
Who is this Style most likely to appeal to?
These funds are more suitable for investors who are looking to avoid unethical industries and/or practices or benefit from investing in companies with strong ethical credentials.
Many Sustainability Themed funds have ethical criteria that are similar to those in ethical funds. Some Environmental, Sustainability Tilt and ESG Plus funds also have similar policies although many do not and are often less extensive. These funds tend to be referred to as ‘ethical’. However no single strategy suits everyone so it is important to read fund details before recommending funds.
Values, values based, personal opinions, social impact
Offered by a range of often well-established fund providers.
Note – these funds tend to have been launched earlier than many of the funds in other SRI Styles so often have highly comprehensive (broad based) strategies.