Friday, 8 March 2013


What to do about Ethical Investing?

And Ecclesiastical Amity International A Income Fund.

21% of Britons smoke, 63% have had at least one drink in the past week and the National Lottery is the largest contributor to good causes in the UK. And I don't hear any calls to abolish our Armed Forces.

Yet, in a recent poll (Mori, 2010) consumers thought banks and financial institutions should direct their investments at concerns that:

Respect human rights (67%)

Invest in fair trade (66%)

Protect the environment (62%)

Do not manufacture weapons (59%)

Tackle climate change (59%)

And are not involved in gambling (38%), tobacco (37%) or alcohol (22%). 
Companies know what we want to hear and they advertise accordingly: (source of image EIRIS, click on it to enlarge). But do companies comply? What should ethically-minded investors do?

The NGO Ethisphere ranks companies every year for their ethical qualities. In 2011, 110 companies worldwide fitted the bill. 26 companies dropped off the 2010 list because of ethical infringements (court cases and the like) and 36 companies joined the list.
Do ethical companies perform as well as others? According to Ethisphere they do better. 

Ethisphere produced the following table, beginning in 2007 when it first began its surveys. Ethical companies (in green) performed significantly better than the S&P 500 (in grey).
So which British companies made Ethisphere's 2011 list? They were Standard Chartered Bank, Northumbrian Water, Premier Farnell, The Co-operative Group and British Land. However, Northumbrian Water was taken private in 2011, the Co-op is not a listed company and Standard Chartered, after paying out $357 million in fines for breaking the Iran embargo, cannot now be on Ethisphere's list. This leaves Premier Farnell, which is highly indebted, and British Land which, with two-thirds of its assets in retail parks and a rotten trading history, is best avoided. 

This leaves us with ethical investment funds. 

The investment community, ever eager to attract money and satisfy the consumer-investor, has launched over 100 ethical funds. The EIRIS Foundation, which specialises in analysing ethical investing, has rated these funds according to 17 ethical considerations. They vary from animal testing for pharmaceutical/medical research and pornography to non-sustainable timber and equal opportunities (a company should have at least one female executive Board member). One consideration, which EIRIS calls Positive Business Focus, relates to policy and transparency on ethical issues. The Good Guide provides scores for this variable. 

A 2005 study by Erasmus University in the Netherlands found that, between 1990 and 2001 there was no statistical difference between ethical and other funds. But what do ethical funds invest in? Many have been criticised for investing in unethical companies. I tested a sample of the FTSE 100 - the ten component companies that begin with the letter 'A' - for their ethical credentials. 

Aberdeen Asset Management: The company is very successful in allocating funds, thereby helping pension funds, insurance companies and individuals to meet our obligations. But it does not invest ethically. 

Admiral Group:  This insurer has helped to push down the cost of motor insurance in the UK. But, as it inextricably forms part of the car industry, it fails to meet the criteria of climate change and the environment. Also, as it has only 2 women on its 12-member Board of Directors and neither are executives, it cannot be said to be an equal opportunity employer.  

Aggreko is the largest supplier of temporary energy sources, mainly generators, in the world. It keeps the lights on when the regular supplier fails, perhaps due to a natural disaster. But it supplies electricity to the Royal Navy's nuclear-powered and armed submarines when they dock. If this wasn't bad enough, the Good Guide gives it a score of 2.7 out of 10 for environmental transparency and it has only 2 women out of 11 directors, and neither is an executive. 

AMEC hits the ethical barrier by supplying equipment to both the nuclear and oil industries. And it doesn't have a single woman on the Board. 

Anglo American, the South African-based miner, has signed up to all the right ethical movements. But the charity War on Want charged the company in 2007 of harming "the environment, livelihood and health" of people in South Africa, the Philippines, Ghana and Mali. A 2008 Renewable Resources Coalition report accused the company for community, worker safety, public health, and environmental problems at their mining operations in South Africa, Zimbabwe, Ghana, Mali, Ireland, and the United States. 

Antofagasta is the largest copper miner in the world. And copper is essential for electricity. A UN study found that the province in which it is based in Chile has the highest income and Human Development Index after the capital. However, as it is accused of overmining and excessive water usage in a dry part of the country, it damages the environment. And it does not have a single woman on the Board. 

ARM Holdings produces 95% of the chips in mobile phones. And mobile phone operators, according to EIRIS, are responsible for the reception of pornography. It is not an equal opportunity employer, judged by the composition of the Board (2 women non-executives of 11). 

Associated British Foods was targeted in 2012 for its tax avoidance scheme that save it 10 million pounds annually. This week Action Aid accused it of not paying taxes in Zambia for the last 5 years, despite having the largest sugar company in the country.   

AstraZeneca has, along with other pharmaceutical companies, done more for the health of humankind than perhaps any other industry.  But it tests on animals and stands accused of peddling the drug Seroquel, knowing it was a cause of diabetes. It tests on humans in Eastern Europe and Asia, where standards are lower. A lecturer at Harvard Medical School accused it of cheating on its testing of Nexium. The Swedish police investigated the company's influence on the granting of the 2008 Nobel Prize for medicine. In 2010 AstraZeneca agreed to pay £505 million to settle a UK tax dispute related to transfer mispricing. To top it all, the company sponsors a US Political Action Committee, which is considered to be unethical by EIRIS. 

Aviva, the big life insurer, has been involved in the miss-selling of PPI. Also, its former boss resigned after shareholders voted out his excessive remuneration, highlighting poor governance.  

None of the 10 companies pass all the tests for the ethical investor. It must be doubtful that any company complies with all 17 ethical criteria to the full. Yet hundreds of ethical funds are invested in thousands of companies.  

The ethical investor would be wise to: 

1. Define what ethical criteria are most important for he or she.

2. Consider the good a company does, and compare that to its ethical failings.

3. Review the business case for the investment as you would any other. It is hard enough to make a real gain from investing without paying a premium because the company you select is ethically satisfying.

4. Recognise that sometimes a collective investment will include some unsatisfactory ethical components. But that the only way to get exposure to a specific market (maybe it's the BRICs) is via such a fund.

5. Use EIRIS's analysis of the ethical funds on offer (available at its website) as a first step. Find out the companies the fund invests in to see how close they fit your own priorities as an ethical investor.

6. Review your ethical portfolio regularly. Given the turnover in Ethisphere's list, there is a one-in-four chance that a company deemed ethical will cease to be so in a year's time. 


Ecclesiastical Amity International A Income Fund. 


Given the difficulty of investing ethically, Ecclesiastical Amity funds, which abide by the rules set out by the Church of England, offer an attractive alternative. Their funds filter companies for (from Ecclesiastical's prospectus):

"Exclusion criteria - the negative attributes we avoid:

We screen out companies earning more than 10% of pre-tax profits or turnover from:

  • alcohol production
  • gambling operations, like betting shops, internet websites, horse and greyhound tracks, lottery selling outlets, licensed bingo halls or casinos and supplying gaming machines paying cash prizes
  • pornographic and violent material
  • tobacco production
  • strategic weapon production.
We also actively incorporate the following in our criteria:
  • animal testing: we don't invest in companies using animals to test cosmetic or household products. We do invest in companies that utilise animal testing for pharmaceutical research, but would encourage them to develop and use alternatives, like computer modelling
  • oppressive regimes: companies operating in countries with oppressive regimes are considered on a case-by-case basis. We aim to distinguish between activities that benefit people and those that support the regime.
The positive attributes we look for are generally but not exclusively:


  • business practices: following ethical practices towards customers including maintaining product quality, ethical sources of supply and respecting indigenous peoples
  • community relations: making charitable donations, employing local people, offering work placement schemes
  • corporate governance practices: transparency, anti-bribery and corruption codes, adhering to International Labour Organisation (ILO) regulations on labour and child labour
  • education: providing training and development along with access to education
  • environmental management: supporting biodiversity, managing their climate change impact and carbon footprint, water conservation, air pollution, and managing waste and recycling, and supporting renewable energy
  • healthcare: providing affordable healthcare and access to medicine
  • human rights: supporting basic human rights by adopting the United Nations Universal Declaration of Human Rights
  • labour relations: promoting health and safety, transparent pay structure, union participation, professional development, employee participation, whistleblower protection
  • urban regeneration: supporting social/affordable housing." 

Ecclesiastical offers the private investor  a route into ethical investing, with funds covering the UK, Europe and the World for equities as well as a bond fund. 

I have selected the Ecclesiastical Amity International A Income Funds because UK investors require funds to give them an exposure to the global economy. Since 2000, the fund has returned 144% to investors compared to 75% for the MSCI World Index and the average 89% for Global funds. (Source:  Morningstar).  

The fund has been managed by Robin Hetworth since its foundation in 1999. Morningstar rate it as 'above average returns' for 'below average risks.' The EIRIS Foundation gives this fund an approval of 12 out of the 17 ethical considerations it reviews. It yields 1.4%. 

The ethical investor will want to contemplate the underlying investments in this fund, which are to be found  at:

Or by contacting the fund manager.