What Do we Call Transformation?
Robin Currie

So, first I have to tell you how much I hate ethical investment. Not the idea, but the name. It makes me think of being regarded as a nice but rather naïve person who doesn’t mind losing all their money, providing that it isn’t supporting things which I disapprove of. Is that how I come across? I hope not.

The issue is the word ‘ethical’. Wikipedia defines it as a moral philosophy coming from Latin via Ancient Greece and “encompassing right conduct and good life”. It developed in the middle ages to include the ‘summum bonum’ – i.e. the ‘greatest good’ - which is held by many philosophers to be more important than moral conduct.
There is quite a detailed argument about how to prioritise physical issues against moral ones, but the most common interpretation is that we are supposed to deny ourselves for the benefit of others. That is, if I’m a good person, I won’t make as much money and somehow this will be to your advantage.
Back in the nineteenth century, the Methodist Church wouldn’t invest in the stock market on the basis that their fundamental beliefs included having nothing to do with alcohol, tobacco, firearms or gambling - and they regarded the stock market as betting. However, there was a conference in 1926 at which they agreed that investing was acceptable – but obviously that no money should go into alcohol, tobacco etc. So any investment which excluded these things was regarded as ‘ethical’ – which is where the phrase ‘ethical investment’ comes from.
You will notice that there is absolutely no reference to the idea that we should try to make less money in order to benefit other people.
But here’s the main point. What the Methodists were trying to do was to make money without breaching their doctrinal guidelines. What they weren’t trying to do was to change society. However, this is what we are aiming to do. To make money and change society for the better. And it’s one of the reasons that the phrase ‘ethical investment’ is such a problem.
Let me put this in context. If you’re trying to influence a company and you ring them up and say “Hello. We don’t invest in you because we don’t approve of what you do” it will have very little impact. However, if you say ‘Hello. We’d like to invest in you but we’ve noticed that you have a poor record in certain areas’ – it’s more likely that they will start to consider changing. Especially if you have a lot of money to invest. It’s a question of stick and carrot. There are different ways to influence companies, such as standing outside their annual general meeting and throwing stones at the shareholders as they go in. Is this likely to make them sympathetic? I suspect not.
On the other hand, if you find a company which may have a poor record on say environmentalism, but where there has been a board-level commitment to change, if this attracts an influx of capital it will support them to shift. And this is the whole point about ‘constructive engagement’. It would be nice to invest exclusively in organisations which had a perfect record on social responsibility, ecological sensitivity and fair trade. Which didn’t invest in armaments and wouldn’t do business with a provider who didn’t exclude child labour. That would be great. How many are there? And are they profi table? And if you invest exclusively in one area of the market, when the market shifts – as it did recently - will the risk at which your money is held increase? More to the point, does this kind of strategy change society?
Well, the answer is yes and no. Investment in this area is up by nearly 30% and as a result there are an increasing number of ‘ethical’ funds a. Virtually all of these have exclusions – that is, they won’t invest in certain areas. Some are ‘greener’ than others (this doesn’t mean that they are ecological, by the way, just that they exclude more areas). And then there are specialist ecological funds which only invest in environmental areas rather than not going into alcohol, tobacco etc. Finally there are several new ‘climate change’ funds which ostensibly support companies which may be able to make a difference (or at least make a profit) because of global warming. There’s a list on the UK Social Investment Forum website at http://www.uksif.org/consumers-advisers/consumers/invest-ability/ funds_and_providers#286752 although this only refers to fund managers who are members of UKSIF.
Having said which, you need to speak to a specialist adviser if you’re thinking about investing in this way. Let me give you an example of why. There are specific exclusions in some funds and general exclusions in others. Equally, there are particular areas which some fund managers are committed to supporting, while others are looking to develop a whole area. And as an investor, you need to establish what are your overall investment criteria and the risk at which you’re willing to invest. Most eco-friendly funds have to invest in smaller companies and are therefore regarded as more volatile and higher risk. If you’d like to support the environment but don’t want to expose your holdings to a unstable market, you need to know what the options are.
And if you’re someone who wants to exclude say, animal testing, some ‘ethical’ funds will be suitable but others won’t. Equally, there are ‘ethical’ funds which will say that they’re committed to sustainability but will have holdings in companies such as Shell or BP. And some of the ‘climate change’ funds invest in organisations such as Rolls Royce (who make most of the world’s climate destroying aircraft engines) or Toyota (who manufacture most of the world’s care engines). There are reasons for these holdings but you need to know what they are and if they’re appropriate to your personal beliefs.

So, in summary:

1. ‘Ethical’ investments are designed to exclude certain holdings such as alcohol, tobacco, firearms or gambling. Most also cut out areas such as child labour or companies which deal with child labour.
2. ‘Green’ funds exclude more than standard ‘ethical’ funds – but this word has nothing to do with environmentalism.
3. Some ‘green’ or ‘ethical’ funds are committed to ‘constructive engagement’ which is about making money while changing society. But some aren’t.
4. There are specialist eco-funds which invest exclusively in areas such as renewable and sustainable energy, water and recycling. These are generally more volatile than the mainstream funds and can be riskier investments.
5. Green, ethically-screened and environmentally-sensitive funds make about the same amount of money as the rest of the market. Because they can be more volatile, when the market is up they can make more. When the market is down they can make less. Be warned.

And finally…if we’re not going to call them ‘ethical’ what the hell should they be known as? There are several options – ‘socially responsible’ or ‘sustainable’, but they don’t work for me. I’d wondered about ‘transformational investment’ although it’s a bit of a mouthful. What do you think? Give me a call…
Robin Currie is an Independent Financial Adviser specialising in green, ethically screened and environmental-sensitive financial products. For an appointment call 01392-411630 or e-mail robin.currie@barchestergreen.co.uk. You can also log on to the website www.barchestergreen.co.uk. Robin also runs the highly acclaimed workshop Making Friends With Money www.makingfriendswithmoney.com or call 01392-3463