Over the past few years I imagine I have written over 300 blog articles. Many of them on investing. But one subject I haven’t really touched on is responsible investing.
It’s a prickly subject. Mainly because what is ethical or responsible to you will likely be different to what is ethical for me. And that is the main reason I am not a big fan of ethical funds.
That does not mean I don’t care about important issues such as weapons, gambling, pornography, and so on. They can cause some real damage in our society and of course I am not a fan.
But what I am not in favour of is the way that ethical funds are packaged to us.
A very brief summary of ESG investing
There are three elements to ESG funds:
Environmental
Social
Governance
Environmental is investing based on a companies impact on the environment, such as pollution and climate change.
Social is investing based on how companies treat people, such as diversity in the workplace and working conditions.
Governance is investing based on a companies standards, such as acting with integrity and transparency.
There are two types of ethical funds.
Funds that only select companies that only display high weightings to each of E, S and G above. This is called positive screening.
The other is funds that don’t select companies that score low on E, S and G. This is called negative screening.
My issues with ethical investing
1/. Negative screening
One of my issues with investing ethically is that most of the funds that invest “ethically” in New Zealand, use the negative screening method. Negative screening goes no where near as far as positive screening does. Negatively screened funds are not actively looking for companies that are doing good. They are looking for companies that are doing bad.
2/. My definition of ethical is different
Secondly, a fund managers definition of bad is different to mine. One such example, is that most of the ethical funds in New Zealand all invest in Facebook. The same Facebook that shared the Christchurch terror attack online or turns a blind eye to hate speech. Facebook seems to get a free ride in the ethical investing space because it’s investment returns have been so good. This tells me that many ethical fund managers are putting profits above ethics, which then begs the question, why are they even labelled as an ethical fund? Or maybe my ethics are just that much different. Either way, it has been found that many ethical funds are not even that much different than similar non ethically labelled funds, with regards to the companies that make up the funds. Too many funds want the best of both worlds, ethics and returns, and that means not optimizing on ethics.
Until ethical funds put ethics above profits, I can’t get on board.
Also, unless you work in a company, it is very hard to judge a company correctly on the ESG factors. Companies are very good at hiding their misdeeds and it can be decades, if at all, before their bad behaviours are found out. One example, may be a company who is recently discovered that it treats its women poorly. That is something that may have been going on for years.
3/. An ethical fund is self labelled
That means the company that offers the ethical fund is the company that also labels the fund ethical. There is no independent body determining what is ethical or not. It really is a bit of a cowboy industry in that regard.
4/. Negatively screened funds are really not that dissimilar to non ethically labelled funds. Positively screened funds are expensive
If you find a cheap ethical fund, then chances are they are not very active or good at finding suitable investments that fit the bill.
In other words, I am not willing to have a less diversified fund for immaterial ethical difference, nor am I willing to pay so much more for a better managed (positively screened) ethical fund as the fees eat too much into my returns.
5/. Less diversification
The best ESG funds that say what they do on the tin, also tend to be the least diverse. This is because the most ‘ethical’ companies tend to come from similar industries, such as tech. The industries that are most focused on ESG will have a very high weighting in your investment fund which does open yourself up to more risk.
6/. Limited impact
Finally, and what is probably my most important reason for not seeking out ethical investment funds, is that I don’t think it changes companies. When I buy a company share, I am not buying it from the company. I am buying it from someone else.
So by me not buying a share, a company’s performance isn’t impacted. If their performance isn’t impacted, then they have no reason to change their ways.
The only time that my decision not to invest in a company may impact them is when the money is going to the company directly, and not to another shareholder. Such as during an initial share offering (IPO) when the company is raising funds, or if I am lending direct to someone such as bank savings or bonds. More impact can definitely be made there.
Final thoughts
So there you have it. I have finally written about something I never really had the desire to write about.
But just because I don’t seek out ethical investing that doesn’t make me unethical.
As you can see there are lots of reasons why I don’t specifically seek ethical funds.
When there is a well diversified, low cost, positively screened fund that matches my ethical considerations and is labelled as ethical by a truly independent committee, only then may I consider it.
I am cynical of the actual impact of ethical investing as detailed above.
But more importantly, I consider myself a very ethical person in my everyday life.
I have seen people hellbent on investing ethically, yet in their own lives they drive their car everywhere, travel every month, and work for companies that are dodgy at best!
We donate money and time. I have set up a business that helps people get ahead in life. We recycle religiously. We are looking to live in a house that is less reliant on energy. We buy NZ made as much as possible. We eat very little meat. These are the areas that will have much greater impact than whether or not I invest in a certain fund.
Now if I can just have the kids not waste so much food!
As always, these are just one mans thoughts.
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The information contained on this site is the opinion of the individual author(s) based on their personal opinions, observation, research, and years of experience. The information offered by this website is general education only and is not meant to be taken as individualised financial advice, legal advice, tax advice, or any other kind of advice. You can read more of my disclaimer here