All things bright (red) and ethical

The text below was published in this week’s Panacea Adviser ‘Bento Bulletin 462’ (newsletter).  The article discusses relevant issues for financial advisers following BBC Panorama’s criticism of Comic Relief’s investment strategy.

Panacea Adviser, the free online adviser portal, email their newsletter to around 15,000 advisers twice a week.

See link: http://www.panaceaadviser.com/main/p23/Bento_Bulletin.htm , or you can read the article below.

All things bright (red) and ethical…

Many things ‘ethical investment’ have made headline news recently.  Indeed it is tempting to run a competition to see who can find the most articles that really have nothing to do with ethical investment…

The Panorama exposé  ‘All in a Good Cause?’ brought this area into sharp focus again this week, with a harsh but necessary critique of the way Comic Relief invest their donations.

There may not be universal consensus regarding what the Panorama team had to say, but in a nutshell, the issue for Comic Relief and others is as follows; charity trustees are obligated to maximise the profitability of their investments – but they are also allowed (by the Charities Commission, CC14) to take the views of their donors into account where there may be reputational risks associated with their investment decisions.

According to Panorama, Comic Relief holds investments in armaments companies, tobacco companies and manufacturers of alcohol.  The first of these has always been a key area of concern for ethical investors, whereas alcohol and tobacco have tended to feature lower down the rankings.  All however are common exclusions amongst ethical funds.

This presents a problem for charities with money to invest. Solid, income bearing, ‘defensive’ stocks can be both attractive and useful.  Yet holding such assets can offend donors and therefore reduce their ability to attract donations and help people.

Personal preferences aside, investing in companies that may hamper a charity’s ability to fund raise is a problem.  Yet Comic Relief has a further challenge.  There is no doubt that both tobacco and alcohol are bad for you, but perhaps more importantly, both are disproportionately likely to damage the lives of the young and the vulnerable that Comic Relief specifically sets out to help.

Charities who invest in this way are therefore effectively ‘betting against themselves’.  As well as making little sense, this has the potential to cause significant embarrassment.

So what can advisers do if they are faced with either charities or individuals who have a clear ‘ethical’ mission or personal values?

Many ethical funds have enjoyed strong performance over recent years, so it would be easy to say ‘invest ethically’ – and sit back.  However, in practice things are not quite that simple.

Whilst funds with wide ranging ethical avoidance criteria might suit some investors, for others they are of little interest.  It may be that their aim or mission is relates to environmental issues, sustainability or animal rights – so one size definitely does not fit all.

The sriServices website carries explanations of the many different styles of ethical and sustainable and responsible investment (SRI).  See  http://www.fundecomarket.co.uk/ .  There is also help with fact finding clients’ ethical needs available via http://www.fundecomarket.co.uk/fund-ecomarket-tool-overview , which links to the Fund EcoMarket ‘SRI FundFinder’ database http://fundecomarket.co.uk/ .

But in spite of the high profile of this area the problem advisers face are also systemic.   Most retail SRI and ethical options are low profile and misunderstood as their strategies differ from ‘conventional’ funds.    ‘Environmental Social and Governance’ (ESG) factors are also often overlooked by portfolio planning tools and SRI options are rare.   This leaves advisers at risk if clients’ needs cannot be met.

Some first steps that can help change this are:

1. When talking with clients… Identify which clients are interested in this area. Once identified, advisers need to understand their personal goals as well as their risk capacity and opinions, as these will vary.
2. When talking with fund managers or distributers...Ask how they integrate ESG issues into their strategies and discuss the SRI options they offer. Information flow to advisers in this area is in part limited as a result of a perceived lack of demand. Advisers can help change this by ‘starting the conversation’.
3. Service providers. Encourage service providers to ‘up their game’.  The tools that are  available to advisers significantly lag potential client demand.  Ask for ESG factors to be integrated into investment analysis and portfolio construction tools. Ask for ‘SRI’ or ‘ethical’ portfolio options also – so that you can have a choice of packaged options.

These are all areas sriServices can help with and if you are interested in this area do take a look at our website http://www.fundecomarket.co.uk/ or get in contact via Julia@sriServices.com .

If you would like to know our views on ‘SRI and risk’ – in particular within portfolio planning tools – you may also like to read our recent blog ‘Would you rather hug an index or a tree?’.

We welcome your views on this area and also love to hear from you via brief online survey: https://www.surveymonkey.com/s/66JXMDM