The ethical investment dilemma
Written by Paul Dodd on June 19, 2014.
Ethical investment is a subject that often comes up in the bars and coffee shops around Phnom Penh. As a developing country with a large number of active Non-Government Organisations (NGOs) Cambodia attracts many people with an interest in ethical or Socially Responsible Investing (SRI). However the issue of SRI is far from straightforward. It is less black and white and more fifty shades of grey.
People normally think of ethical investing in two ways; either straightforward good versus bad moral terms or whether they will produce a return comparable to ‘unethical’ investments. However the picture is actually far more complex than that on both counts.
Let’s start with looking at the issue of what is ethical. Opinions vary enormously and ultimately it comes down to one’s own subjective, individual opinion. Many people consider it is a simple matter of investing in funds that weed out the so called ‘sin’ sector; tobacco, alcohol, arms, pornography and gambling. Well that’s quite a list but there is actually a number of funds that do this and do it pretty successfully. However, this is just a starting point as many people also place a very high priority on green issues and want an eco-friendly option. Other investors want to back companies which emphasise social responsibility and have strong corporate governance and a well-defined community policy. Vegans often don’t want to place their money in funds that includes producers and retailers of meat, poultry, fish and dairy. Then there are people that actively want to invest in funds which champion issues they passionately believe in such as alternative energy or organic farming. The list of requirements is infinite.
The problem is that there is no ‘one size fits all’ ethical investment option. A fund that fits one ethical criterion may have stock holdings in a company that fails another, for example an environmentally friendly fund may hold stocks in a brewer or pub operator. It means that the ethical investors must be very clear about what their red line issues are otherwise they may be unintentionally backing something they are opposed to. It’s tricky, requires care and research and it limits the choice, severely in some cases, about where people can invest.
This brings me to the second issue with ethical investments, that of returns. Most people generally believe that investing in an ethical fund will deliver a lower return than funds which are unrestricted. This is not by any means always the case. Over the last five years, the basket of UK equity ethical funds as a sector was in the 56th percentile as measured against all funds - so in the middle. However within that there were sharp variations and there are some ethical funds that stand comparable with high performing general investments that are no subject to any restriction. It is a question of making the right choices.
So as you can see going ethical on your investment choices requires more than a token amount of thought but for those that are determined to match their investments with their principles options are available.