Visiting the south coast last weekend it was remarkable to see, in February, the streets full of people in t-shirts and sunglasses.
The warm weather made for a pleasant day trip but also created a nagging sense that this wasn’t quite right, and perhaps even a bit worrying. I don’t know if this February’s summer-like days are themselves a sign of climate change, but I couldn’t help but wonder.
What’s in less doubt is the evidence that climate change in general is real, and that it’s man-made. Nasa - the National Aeronautics and Space Administration - states, simply, that: “Climate-warming trends over the past century are extremely likely due to human activities. In addition, most of the leading scientific organisations worldwide have issued public statements endorsing this position.”
As the evidence builds, so does demand for action on climate change. That includes among investors, who are increasingly insisting that their invested money not be used to support enterprises that harm the environment.
Environmental concerns are just one arm of ESG investing - which stands for Environmental, Social and Governance. SRI is another acronym you will hear - that’s Socially Responsible Investing.
Dozens of funds now exist promising to invest with these aims in mind. Their approaches can differ markedly - some will apply broad screens to filter out companies that operate in certain sectors, or profit from doing certain activities. Others will be far more discerning, investing only in enterprises they believe do good in the world.
For investors, it has created a difficult field to navigate. Any fund can market itself as ‘ethical’ but there is no common definition of what the terms means. Conversely, I know of funds that don’t market themselves with an ethical badge but which apply similar rules nonetheless.
ESG funds can sit in the Investment Association’s ’Specialist’ sector, or they can fit into the usual regional ones. For these reasons, the Investment Association has been looking at grouping them together in a new sector, and at drawing up a standard definition of what funds must do to fit into it.
Those plans have their critics, who say the subjective nature of what is ethical makes it an impossible task. Last week I interviewed Ketan Patel, manager of the EdenTree Amity UK fund, one of the longest-running ESG funds, who explained the kinds of competing considerations he and his team have to weigh up when they decide what makes it into the fund.
There may be obvious sectors, such as oil and gas, which are ruled out on environmental grounds (although they still make into some ESG-branded funds). But what about companies that use similar resources, like smartphone manufacturers that need rare earth minerals for their devices that are extracted from the ground with unregulated labour?
What about the giant tech companies which rely on selling personal data, with all the nefarious potential outcomes that come with that? What about companies that promote gambling, or vices like pornography? What about nuclear energy, which may be necessary if we are to reduce our reliance on fossil fuels? What about fashion chains that promote a throwaway culture for clothes?
All these concerns are highly subjective, and a common definition may struggle to encompass them and remain meaningful. This subjectivity is also why some have doubted ethical investing as a concept, accusing it of making some people feel good while, in reality, not ruling out many very harmful activities.
For what it’s worth, I think such objections are wrong-headed. As a friend explained on the south coast at the weekend when we discussed this - sure, she may not be able to say that her money is never used for damaging activities, but she can at least say it doesn’t support companies that make bombs. And that’s not nothing.
In that sense we should look at investing ethically in the same way as we look at living our daily lives ethically. You may recycle and buy free range and organic and never use a plastic bag if you can avoid it, but there will still be choices you make which, unfortunately, harm the environment. The person who never drives or flies or buys something that’s been shipped from overseas is very rare, but should we stop the positive things we can do? Of course not.
It is up to investors to find for themselves what an ethical fund invests in and what it does not. It’s quite unlikely that you will find a fund that never, ever contradicts your own personal red lines, but some will get closer than others. You can usually find details of how a fund invests from the factsheet published by its provider company.
The value of investments and the income from them can go down as well as up, so you may get back less than you invest. EdenTree’s focus on securities of companies which maintain strong environmental, social and governance (“ESG”) credentials may result in a return that at times compares unfavourably to similar products without such focus. No representation nor warranty is made with respect to the fairness, accuracy or completeness of such credentials. The status of a security’s ESG credentials can change over time. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.