At Altor we like to frame questions differently and this is one of them. There is a taint to Ethical investing with some investors who hear the phrase and assume higher costs and lower performance and so make an immediate gut response based on those preconceptions. If however you ask people if they are unethical or would act unethically you tend to get a pause and a chance for the slow thinking brain to kick in and can open up a debate that is more nuanced. It is not that everyone will end up with an ‘ethical’ investment but they will have made a more thoughtful decision.
Pause is important with ethical investing because it is now such a broad arena of investing that most clients we meet don’t realise the range on the ethical spectrum.
Most people understand ethical investing as a process of screening out the ‘bad’ companies, typically arms, fossil fuels, pornography, gambling etc. There is however a whole field of ethical investing that allows positive screening, a process whereby the investments used produce a ‘social’ return as well as a financial one. With this type of investing you can make money as well as doing good in the world. Examples include overseas water projects, green energy development and reducing reoffending amongst released prisoners.
In addition there are some interesting tax reliefs available from the government for investing in this space for example Social Investment Tax Relief and Social VCT. SITR offers 30% income tax relief and capital gains tax deferral whilst the Social VCT offers the same tax benefits as standard Venture Capital Trusts (VCT).
There are some really good fund managers operating in the ethical space at the moment but the negative screening investment process has been around longer and therefore is still the one that is available to the mass market at low entry levels and reasonable costs. If you want to negatively screen a bespoke list of sectors that you personally care about then the portfolio sizes need to be bigger. Interestingly, although positive screening or social impact investing is a newer development it is now possible to access this style of investing with smaller portfolios, albeit the costs side has yet to catch-up with its lazier negative screening big brother.
So is ethical investing the right thing for clients?
As all of my clients are bored of me telling them, it depends. The returns are worse some years (generally commodity driven) and better in some years, there is no performance reason one way or the other. It really does come down to how you feel about the capital you have deployed in the world.
- If you see your wealth purely in terms of what it is there to do for you and your family then ignore it and move on (there is no value judgement made by us about either decision).
- If you feel that capital deployed always has a set of consequences at some point further down the economic chain then ease your mind and negatively screen.
- If you have strong ideas about the state of the world, then deploy your capital to do some good even if it is individually marginal.
If on the other hand you are trustee of a charity or responsible for a big institution then you need to look at this area seriously. We are increasingly in an activist and politically engaged age. If you aren’t careful about what you are investing in then you could put off donors and suffer bad PR. The Church of England got into a lot of trouble not so long ago for investments it didn’t even know that it had in Wonga. There are entire movements dedicated to forcing institutions to disinvest from fossil fuels and donors care about your impact as a charity beyond what you spend your money on.