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Investing for good

Many charity and pension trustees and some individual investors are asking if they can use their investment portfolios to make the world a better place. The answer is yes, you can.

Many charity and pension trustees and some individual investors are asking if they can use their investment portfolios to make the world a better place. The answer is yes, you can.

by
John Redwood

in Features

29.08.2019

A portfolio can be used for good, but it is a complex interconnected world where judgements have to be made by the investor. Some socially-responsible investment approaches are based on excluding certain types of company from a portfolio of shares. Others are based on a positive vision of the future, placing more emphasis in the portfolio on the types of business and activity that will make the world better in the future.

There are a range of issues to consider. Socially-responsible investing may entail screening companies for their governance, for their attitude towards suppliers, their use of energy and raw materials, as well as their approach as an employer and ethical qualities. The tougher the screen, the more limited the investing universe becomes. This may bring with it a poorer performance than the market as a whole in certain stages of the cycle, and may increase the risks a little.

Cigarettes and guns

Two of the most popular areas to exclude from a socially-responsible portfolio are tobacco and armaments manufacturers. People rightly see cigarettes as harmful to health and are worried about investing in companies that make money out of them. It is relatively easy to exclude the few large tobacco companies worldwide that make most of the cigarettes. It leaves open questions about how much further if at all should the investor go. There are many retailers who make money out of selling the cigarettes, there are suppliers profiting from making the packets and materials that go into the finished product, and a small army of service businesses and banks supporting these companies. The funds that exclude tobacco usually allow a percentage of its turnover to be derived from cigarette-related business to allow for this interdependence of others on the tobacco industry.

Grey areas

Weapons manufacture is even more complex. Most of us can agree that we condemn the manufacture of aggressive weapons and their sale to warmonger dictators or angry terrorist groups. Western governments claim to regulate the trade to deal with this problem. Seeking to ban investment in aggressive weapons sold to states which might use them in war elicits the reply from such governments that they need the weapons for defensive purposes and would only use them in defence of legitimate national interests threatened by violence. Investing in modern drone technology brings out the shades of grey. There are civilian drones designed to automate processes. There are defensive drones, flying surveillance missions to protect a country against threats. There are drones that can carry and release bombs, which could be defensive or aggressive depending on the owner and their use.

Again the issue is usually resolved in portfolio construction by eliminating only those companies that have a high proportion of their turnover from questionable products and services. Just as with tobacco there are many other companies involved in supporting and assisting the weapons maker. There is also the question of the buyers and users. The main customers are governments. The main users of force are governments. This activity is often financed by bond issues by the state concerned. Should the moral investor be worried about helping finance this type of activity?

Many investors conclude that the complex interrelationships of businesses make it difficult to come up with a good negative screen to exclude all the bad activities. They may well have strong moral and political views of their own, but think these are matters which have to be settled by democratic governments in advanced countries, adjusting to public opinion and enforcing the right rules on all businesses.

A matter of judgement

Many advanced country governments have banned recreational drugs, stopping quoted companies making money out of them, but have not banned tobacco. They have regulated gambling companies to try to limit gambling addiction. Most western states do buy aggressive weapons but see them as a deterrent to rogue states and terrorist groups, not as the sinews of some future war of aggression. Others conclude that they do need to express a view through their portfolio.

There are now both active and passive funds that do exclude companies with a high proportion of revenue coming from unfavoured areas. Trustees need to think carefully about how far they wish to go in setting restrictions on certain types of investment. They might also like to settle for a more positive policy, highlighting investment in substitutes and replacements for the products and services they dislike. These are all matters an investment manager can now advise on to reflect client wishes.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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