Slap in the face for ethical investors

Troubles at the Co-op bank throw yet another spotlight on the merits or otherwise of ethical investing. The Bank previously made a proud name for itself as a leader in setting ethical standards for its investments.

Its latest troubles are an unpleasant slap in the face for ethically-minded investors. For admirers of the Co-op’s philosophy, the issue is: will the bank’s ethical commitment be maintained, especially now its survival involves a major stake holding by hard-nosed US hedge fund managers and other creditors?

The bank’s leader says no. “We are embedding the principles in the constitution of the bank to guarantee this,” claims Euan Sutherland, group chief executive. And for the new investors, the bank’s ethical stance is one of its most obvious competitive advantages.[1] Yet there remain doubts he, let alone the policy will survive.

It would however be unfair to blame the Co-op’s financial troubles purely on its ethical investment policy. It has apparently landed in trouble through its problematic actions over payment protection insurance and other “conduct related issues. Also its original purchase of the Britannia Building Society seems partly to blame for inherited financial problems.

Ethical investing has come in for quite a beating. Terry Smith, a former top broker and now chief executive of his own Fundsmith asset management business, publicly complained recently ethical funds performed badly. They were he said riddled with internal contradictions; five out of the 17 worst-performing funds in the area he most closely followed were ethical or environmental funds.[2]

So does ethical investing make sense or not? More to the point, what exactly is ethical investing and how would you know what is ethical and what is not? This is partly Smith’s point, yet it has been mainly resolved by others who take a longer term view of investing than perhaps Smith and others.

For example, Socially Responsible Investing (SRI) in the US has grown 486% since 1995, while the rest of US assets only grew by 376%. So putting money into ethical ventures makes sense to growing number of interested investors. See chart.

investment chart

So far, total assets of sustainable and responsible investing currently represents about 11% of all assets under management. The chart here shows the steady growth as a proportion of the whole.

Whether this kind of investing makes financial sense remains to be seen. The big shift in thinking stems from the longer-term approach, adopted by admired investors from Warren Buffet onwards. Many new investment strategies for example have developed from the realisation that environmental, social and governance factors will surely play an ever-greater part in the valuation of investments.

A confused “in or out” list of companies that seem to qualify as ethical investment targets, is indeed both arbitrary and likely to lead to inadvertently choosing poor performers, However the trend is towards adopting wider criteria that are forward-looking; for example, avoiding investing in assets that damage the environment, or use up finite resources.

In simple terms, ethical investing is not nearly as dubious as those such as Terry Smith suggest. Most UK equity ethical funds have apparently performed strongly this year as fund managers have avoided tobacco and alcoholic beverages. Moreover mining stocks which many ethical fund managers also avoid have dropped like a stone.

A reputation for high ethics is still worth money in the bank and there are plenty of statistics to prove it.

 

 

 



[1] Hedge fund dissidents, by Kate Burgess, Lombard, FT 22 October

[2] Pensions funds urged not to put money into socially responsible investments, Terry Macalister, The Guardian, Wednesday 18 September 2013

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