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Kirk Rice Blog

Ethical InvestingWritten on January 13, 2020 by Kirk Rice LLP

Ethical Investing
Financial Services Questions

The Question:

I am concerned that, with the fires in Australia; fossil fuel environmental damage; the rapid deforestation of rain forest; and damage to the ozone layer in our atmosphere, it’s time I started to focus on what my investments are doing to counter these detrimental impacts. What advice can you offer on ethical investing?

Kirk Rice LLP answers:

I am concerned that, with the fires in Australia; fossil fuel environmental damage; the rapid deforestation of rain forest; and damage to the ozone layer in our atmosphere, it’s time I started to focus on what my investments are doing to counter these detrimental impacts. What advice on ethical investing can you offer?

We can screen all your current investments for any evidence of these activities, so you can access whether changes are needed. Our investment advice is always to diversify globally using multiple asset types, and we can agree on restrictions on future investments to avoid certain activities. If you do this, we must warn that to restrict investment choice could damage returns significantly. You do not have to buy shares in companies you dislike or in business areas you think are wrong for any reason.

Taking this further would it be better to select well-governed companies, screening for strong board and management structure; having a well-respected brand known for its strong adherence to good principles;  being considered a good employer with good record on safety; being good in the communities where they are active; properly manage data and have good relationships with regulators and authorities. Surely these companies will, in the long run, produce the best returns.

Companies with poor health and safety; poor employment practices; lacking controls over their activities; not taking responsibility for their actions; misusing data, or with an overbearing leadership that ignores the opinion of a chairman or management board will not provide the best investment returns in the long run.

I am sure you can think of companies that appear closer to the latter example. If you had not held them over the last decade, you would not have seen great returns in your investment portfolio.

So should you filter company activities? Take fossil fuels as an example; it’s widely accepted that extraction may damage the environment around the sites; transportation can lead to spillages which extend such damage; the refining and use of the fuels release carbon. Some investors would weigh this against the economic benefit that enabling people to transport goods to market, children to schools and the value of all the economic activities arising from the use of derived products. Some oil producers are also some of the largest investors in research and renewable energy which other investors might say outweighs the negative factors.

Certain investors will avoid fossil fuels but consider electric vehicles acceptable. However, there are many concerns about the impact that mining of the materials that are needed to make the batteries is having. The material is a harmful substance, and there is no means yet to recycle spent lithium from old batteries. Batteries that are using cobalt could cause even more concerns for investors. Cobalt is mined in the Democratic Republic of Congo, where slave and child labour are widespread, and the political situation is unstable. Unlike the continuous exposure for articles exposing bad aspects of fossil fuels, we do not see details of this in our media unless we specifically search for it.

An individual retail investment fund states whether it applies any form of filtering and monitoring of investments for any issue. Some funds will apply a positive screen looking for activities that are beneficial and outweigh the negative. Some funds will invest in fossil fuel companies, whereas others will exclude them because they apply a negative screening.

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Trustees may run your pension fund on your behalf, and their default investment fund is most likely to be run based on maximising returns for a specified level of risk, often automatically adjusted as you near retirement. Unless you decide to make changes to the investment, there are no filters for any of the issues you mention.

Although you can quantify whether a company is involved in the production of something, you may also be investing in other companies that are indirectly involved. If you do not want to invest in fossil fuels because of the impact on the environment, then should you also screen out all the major retailers who also have fuel service stations or sell any oil-based products on their shelves. How far should you go with your investment filters as plastics are everywhere in everything we do. Your mobile phone, tablet and computer cases are most likely derived from fossil fuels.

The application of filters will require an element of judgement to be applied when a factor cannot be quantified. The inclusion of a particular investment will suit one investor but may not be acceptable to the next. For some investors, there are funds that will apply a set of criteria which they can accept, but for others, this will not meet their views. In these cases, it may be best to appoint a discretionary investment manager who will understand the needs of the investor and be able to choose suitable investments.

Choosing an investment portfolio will generally take a little longer than if you want to maximise returns without any filter. There are several hundred funds that have some form of filters applied, and one or more of these could be suitable for your investment needs. Often, we present some of these based on our understanding of an investor’s needs which leads to further discussion and revisions to the filters used.

None of the above should be construed as personal advice based on your circumstances.

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Any reader interested in discussing ethical investing with one of our Financial Planners can telephone 01252 960 550 or email info@kirkrice.co.uk.

Please note: answers are given for general guidance only and specific advice should be taken before acting on any of the suggestions made. Tax treatment is based on individual circumstances and may be subject to change in the future. Information is based on our current understanding of taxation legislation and regulations. Any levels and bases or, and reliefs from taxation, are subject to change. The Financial Conduct Authority does not regulate tax planning.