Balancing the views and needs of ethical investors

Sam Slator 21/08/2023 in Sustainable investing

Ethical issues are, and have always been, inherently subjective. They can vary significantly from person to person due to differences in values, beliefs, cultural backgrounds, and life experiences.

What one individual perceives as morally acceptable might be entirely objectionable to another. You just have to look at the debates – and legal changes – around abortion, euthanasia, or even environmental conservation to see how views can be polar-opposites and divide society.

Reviewing investor views and needs

These differences in opinion are also a consideration for ESG funds – those investing ‘responsibly’ or with an ethical framework. No one single fund is ever going to tick all the boxes for all investors, but that doesn’t mean investment processes can’t, or shouldn’t, continually evolve to incorporate new issues which have arisen.

Aegon, for example, formally reviews its ethical screening every two years. This year, the company asked investors and their advisers for their feedback on its approach. The results were interesting to say the least*.

More stringent restrictions

Respondents to the ethical survey highlighted two areas where they wanted to see more stringent restrictions and the strength of feeling was nowhere more evident than around tobacco.

Tobacco has been a sector under scrutiny for many years and a number of changes have been put into place to better protect consumers, such as advertising bans. Some investment companies – such as AXA and Aegon – also prohibit tobacco producers from some, if not all, of their funds.

And, despite some tobacco companies now coming up with “less harmful” alternatives, no fewer than 66% of respondents supported increased restrictions around the sector* – for example, excluding companies which are exposed to the industry through the distribution or packaging of these products.

Respondents said that “We have a zero tolerance to tobacco production,” and that they would like to see investment firms “consider issues around vaping and nicotine pouches,” because they are not being marketed as means to ease an addiction, “in fact they create a new one. The most cynical form of capitalism.”

Political donations were another area where 31% of respondents wanted more stringent restrictions*. They commented that, “Companies should be banned from influencing government policy by political donations,” and that “In the view of investors politics are wrongly being too strongly influenced by corporations.”

Less stringent restrictions

There were also two areas where a sizeable minority of respondents expressed a desire for less stringent restrictions. 43% of respondents wanted a relaxation on companies providing support services to the nuclear power industry, while 37% wanted a relaxation of screening on genetic engineering*.

The reasons for wanting less stringent restrictions around nuclear power centred on the fact that it is one of the solutions for the transition to cleaner energy. “We need innovative energy solutions and nuclear may be an option to include rather than exclude if it can safely provide energy security,” one respondent said.

But most respondents remarked that it remained a divisive issue. “It’s a difficult call,” cited one. “If the industry could improve its track record we see nuclear power as being very beneficial for emissions.” Worries remain over the risk of disasters and disposal of waste.

Another said, “I think there is enough end client demand to warrant keeping this [restriction] in, but I wonder if views are changing on this one.”

While one respondent pointed out, “Climate change is changing perception for some around nuclear but there is a myriad of social, economic and governmental issues which link to the sector as well.”

For now, most ESG funds are still ruling out nuclear power, as is the VT Gravis Clean Energy Income fund. Its investment advisor, Will Argent, explained why in this podcast:

Genetic engineering was another area where respondents wanted less stringent restrictions. “It’s a tricky area but there are many potential benefits to society from well-handled genetic engineering,” one said.

“I would stay invested and ask companies for strict safeguards around use of those patents,” said another.

“Genetic engineering can go some way to improve the ‘S’ aspect of ‘ESG’, improving significantly people’s way of lives, those directly and indirectly affected,” another respondent commented.

Linden Thomson, manager of AXA Framlington Biotech fund, covered the theme of genetic engineering and other elements of biotechnology in this recent interview:

With Russia’s invasion of Ukraine still prominent in people’s minds, it’s perhaps no surprise that 14% of respondents also wanted less stringent restrictions around military production and sale *, although 83% were happy excluding companies that manufacture armaments, nuclear weapons or associated strategic products as “Ethical clients are opposed to investing in war.”

“As we have seen in the past year, defence is important,” one respondent countered. “However, we would like defence contractors to separate out non-defence activities where they can.”

Another added: “Engineering is important and 2022 has demonstrated, sadly that defence is necessary. I think consideration to including [it] is warranted if the opportunities are robust enough.”

We talked more about the defence sector in this article.

Areas of focus over the next 12 months

Finally, the survey turned to areas of focus that investors want investment companies to focus on in the next 12 months. And with wildfires, floods, and heatwaves all recent headlines, again it was perhaps no surprise that climate change and decarbonisation were the priorities.

Investors wanting to focus on these areas could take a look at Ninety One Global Environment, which has the unique approach of only investing in companies that are contributing to the decarbonisation of the world economy.

Alternatively, new Elite Radar fund, JPM Climate Change Solutions, does exactly what the name suggests: it invests in companies that are developing solutions required to address climate change. The key themes it seeks to tackle are renewables & electrification, sustainable transport, sustainable food & water, sustainable construction, and recycling & re-use.

*Source: Aegon Asset Management, Report on Ethical Investment Survey, May 2023


Photo by feey on Unsplash

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