The ethical investment conundrum

As an example of living the FI principle, every so often people ask me “what is this investing thing you speak of – isn’t it all just a grand casino”. And I point ’em right over to that Monevator fellow who has done most of the hard work, specifically to the passive investing section. Although for a few pints I will talk the specifics of their situations I try and emphasise it’s all ideas and DYOR and all that – everybody is different ,in philosophy, temperament, risk tolerance and lifestyle. However, there are some things people often miss – a few people at The Firm were pointed at investigating AVCs and some others to consider a SIPP. Pointing people at passive investing is pretty much like buying IBM was in the old days – nobody gets fired for it, though it’s curiously passionless at times.

And then every so often somebody comes along and throws you a curve-ball – in this case it is Mrs Ermine, who is looking at pension investing, and to date the general answer has been something like Vanguard Lifestrategy 100 – do so for 20 years and you’d expect to get about the amount you put in monthly back. This is because of the 5% SWR limit and ignoring compounding, as a rule of thumb it’ll do. This is part of her pension savings, Mrs Ermine is far more entrepreneurial that I am so some of the assumptions one makes for wage slaves don’t really apply.

Unlike myself, Mrs Ermine thinks about the wider issues and comes to the conclusion that she wants to invest ethically. This is totally outside my ken. First thoughts are that it obviously reduces the action space somewhat and therefore will intuitively underperform. It also immediately debars you from index funds; you’re becoming an active investor if you decide that fossil fuels are a no-go area, f’rinstance, along with the whole Guardian thing. I know some other PF bloggers have given this some thought – Keeper of the Cauldron on fossil fuels and on wider ethical considerations here. The search for ethical solutions seems to take Cerridwen into racy territory – Abundance crowdfunding strikes me as having a risk profile way ahead of publicly quoted equities and terribly difficult for members of the public to qualify the risk balances.

A last look at our unscarred friendly skies before flight resume
A last look at our unscarred friendly skies in April 2010 before flight resume

Now I have to admit that the cynical me doesn’t see a world of people deciding to leave fossil fuels in the ground unless something cheaper and hopefully less polluting comes along. I only have to see the 4x4s on the school run, listen to the increasing racket of jets in the sky and look at the concomitant scarring of our evenings with vapour trails and how quickly no third Heathrow runway at the start of the Coalition became a firm proposal for one to think that this is the wrong side of the bet, and that’s without the increasing power drain of IT since you’ll only prise smartphones from the cold, dead hands of the addicted consumers. I’d be surprised if this happens in my lifetime, and to be honest, if it does, I think all our investments are going to be written off in such a zero-growth or negative growth world. Capitalism needs growth like a vampire needs fresh virgin blood. It’s perfectly possible to postulate successful zero or low-growth economies, and indeed we seem to be going ex-growth as it is, but they don’t look like industrial consumerism, and they don’t have endless smartphones, city breaks and foreign holidays in them for most people.

But this isn’t my fight. To invest ethically you have to decide either what is ethical, or conversely what isn’t. At the moment Mrs Ermine is in the latter camp – fossil fuels and industrial agriculture are what she wishes to avoid. It’s probably not exhaustive – indeed one of the issues of ethical anything is that it’s fundamentally difficult to be a blameless consumer if you chase anything to its logical conclusion. One should probably add CAFOs to the list, so Smithfield Foods probably fall into the beyond the pale category as well.

An Ethical Investor is an Active Investor?

To my eyes the two go together, although I’d like to hear different. By definition you’re selecting a subset of the investable universe. Now one option would be to be a stock picker, but that’s probably not how Mrs Ermine wants to spend her time, so it’s probably along the lines of this list of ethical funds. Now I don’t do funds unless they’re index funds and the history of non-index funds isn’t illustrious. I observe that Vanguard do offer a couple of socially responsible index screened funds in this list but again, what does that mean? Are there options for ethical investment trusts?

The investment return is low enough as it is – that 4-5% real return hasn’t got much fat in it. To combine active investment and artificially reducing the investment universe seems to be a tough headwind to fly into. Even in the ITs – take Impax Environmental f’rinstance – over the last 5 years the improvement in NAV seems to have been buried in the -12% discount to NAV.

The whole thing does my head in and I have no idea where one would start. The Ermine, with the libertarian social bias is not going to be an expert in this sort of thing but hopefully some readers have given this some thought. Am I missing any rich seams of knowledge or obvious goto places for ethical investment at low cost?


20 thoughts on “The ethical investment conundrum”

  1. The efficient market means that if your wife won’t give BP money I certainly will to no effect on its price.

    There’s no low cost option that I’m aware of. Stick with the whole market and give 0.5% a year of your wealth to chosen charities.


  2. @ mucgoo – Are you really suggesting that the level of demand for a particular asset has no effect on its price?


  3. Stock prices are such that expected return is identical. Or at least close enough that its very hard to second guess. The demand slope is very, very steep.

    There might be a very slight premium due to industry concentration risk for people overweighting the shunned sectors? I can’t imagine that unless a majority of the worlds capital has disinvested.


  4. What’s an efficient market? Is that one where everyone can calculate the future perfectly? Or where one where people (agents?) behave rationally and do what they say on the tin (act in your best interests?)? I am confused because that is not a representation of the world I live.

    Back on topic ethics are personal and I would not trust anyone to replicate my ethics for me.


  5. Investing sustainably/ethically doesn’t have to to give poor returns.

    I think ethical investing is a decent idea. Having said that, the only ethical-ish fund I hold is First State Asia Pacific Sustainability and I chose that some time ago to avoid mining etc, with the more ethical nature being a happy side effect.

    I know Kames do good, dark green, ethical funds though haven’t looked in depth.

    There is a whole spectrum of ethical investing (e.g. Shell is ok as they treat their employees ok) to pretty strict requirements. You’ll need to do a fair bit of reading to have an idea of what’s out there. IIRC, both Morningstar and Trustnet have had series on ethical investing.


  6. Thanks for the mention ermine.

    My investing is only “semi-ethical” πŸ™‚ for many of the reasons you mention. We definitely live in an imperfect world in this respect but putting some money into Abundance felt like a very positive step to take even if it does carry a higher level of risk. I have more in iShares S&P Global Clean Energy but it is quite pricey for a tracker at 0.65%.


  7. @mucgoo Although the Guardian article seems to believe they can change things with divestment I don’t think Mrs Ermine has such lofty aims – her focus is in not actively supporting the bad guys, rather than being a market-maker πŸ˜‰

    @Greg – and very nicely you seem to have done from that fund – congratulations. Arguably it’s from the quite heavy Indian IT balance of the fund but it points to one way of going. Seems to have quite high charges though.

    Kames is interesting.

    There do seem to be two issues in this area – one is philosophical in what is ethical and the other is that fees seem on the high side to me. I’ve never really looked at active funds so may6be it goes with the patch. Over decades that’s not going to have a good effect, but at least as long as it’s known that’s part of the balance I guess.

    @Cerridwen – I guess your position is probably close to Mrs Ermine’s, inasmuch as you seem prepared to either pay a price premium or a risk premium for avoiding the swamp end of capitalism.


  8. The guardian doesn’t actually give an argument for its effectiveness. From what I’ve read it not all effective and there’s a real cost mainly from increased TER (not underperformance).

    You optimise your saving and lifestyle. Do the same with your philanthropy.


  9. It has to be active investing, no matter how slight, a choice has been made to move away from the market allocation.

    I do wonder if you get charged a premium just for something to be marketed as ‘premium’. I know someone who knows a dog who knows someone who works for Triodos bank. It was said (woofed) that they will actively reduce their interest rates so they are not seen in ‘best buy’ tables for savings products, as it gives off the wrong image. Surely profit or interest rates don’t have to be unethical in themselves?

    Mr Z

    (Liking the glossary terms there πŸ™‚ )


  10. I disagree with mucgoo here.

    I think* investing in an ethical fund is a pretty reasonable way at exerting a bit of influence.

    Active asset managers actually go and meet the bosses and boards of companies to try and form an opinion about them. Obviously companies want people in charge of vast amounts of money to invest in them so it’s easy to imagine that the asset manager is listened to. It’s even better if the manager runs normal and ethical funds as he will have extra clout for free.

    The nice thing is, that it doesn’t require either the manager or company to be benevolent or even ethical (assuming no fraud). The board just has to calculate they will get more money from their share options: if they don’t chop down the rainforest for palm oil if it means someone will sell hundreds of millions of pounds from their company etc. etc.

    Finally, I’ll make a shout out for which I think is a good idea.

    As for asset allocation, I have such an enormous** holding in JP Morgan Indian IT, any extra from other funds is very minor.


    * I have to admit, I’m basing this on a feeling rather than evidence, but I can at least see a mechanism.

    ** For me – I am not a rich man, though I intend to become wealthy (not rich). πŸ™‚


  11. There are two questions one might ask oneself when trying to invest ethically: 1) am I providing fresh capital to activities which I cannot ethically support (e.g. in the case of an IPO or issue of new shares or a bond issue); 2) will I be benefiting from the activities of a company (some of) whose activities I cannot agree with, without supplying fresh capital, i.e. from the dividend income/capital appreciation?
    In the case of index investing, I understand that index funds buy shares only on the secondary market. Therefore, no fresh money goes to the company. That would eliminate problem 1). Problem 2) could be solved by donating a certain proportion of one’s dividend income/capital gains to charity. This would negate any benefit from problem 2). If I am correct, then it would be ethical to invest in unscreened index funds.


  12. Further to my previous post: there was an article in the FT about participation in the Post Office IPO. Index funds were not included on the assumption that they could only buy the shares when the company entered the index. However, L&G claim that they would have the discretion to buy shares that were likely to enter the index, not just shares that had actually done so. This puts something of a dent in my attempted solution of problem 2) above. The policy may vary from fund to fund.


  13. Thanks for some great ideas here – there’s a lot more to this than meets the eye. FWIW I did that calculation on the effect of fees of 0.5% (VGLS100 @ .25% + Charles Stanley platform fees compounding at real 5% p.a compared to paying 1% aggregate fees for the same and over 20 years buying annually the difference was 5%. That separates the fees variable although the active selection will of course also change things; there’s at least a 5% ethical premium from fees.

    @rick24 – that’s an interesting way of looking at it though I suspect it won’t wash with Mrs Ermine πŸ˜‰


  14. I don’t think Abundance and Trillion fund are riskier than equities. I’ll get back to you in a couple of years when my loans to E2 and E5 wind turbine farms are due to be repaid!


    1. > I don’t think Abundance and Trillion fund are riskier than equities

      That’s what makes a market πŸ˜‰

      It’s certainly a different asset class, more akin to long-term bonds. I didn’t spend a lot of time trying to qualify this and couldn’t view the offer docs. The market cap of the operations struck me as small, in terms of company size we’re talking AIM rather than FTSE 350 here from what I was able to see


  15. Oh, I almost forgot – I’m sure I’ve mentioned it a number of times before, but I’m a big fan of BACT (The Battle Against Cancer investment Trust).

    I think it’s pretty much ideal – low volatility, low correlation,definitely ethical, zero fees (though a 1% donation to charities) & access to some esoteric holdings. It could make a core to many different portfolios. It is typically at a premium but has some discount fluctuation.

    If you want something that yields a bit, then there are the “green” investment trusts that invest in wind farms, solar farms etc. There’s a category for them in Morningstar. They are at a premium, but much less so than many other infrastructure funds. I recall one of the Solar ones was doing some very sensible restructuring a while ago.


    1. BACT seen an unusual proposition, but taking a butcher’s hook at

      at what the core is the Japan holding has two car makers though I don’t think this troubles Mrs Ermine too much, but the Majedie UK Equity guys have both BP and Shell.

      But it’s certainly a different take on the ethical stance, more on the positively donating as opposed to the subtractive ‘I won’t invest in that’ angle. Indeed it highlights that one of the main things an ethical investor has to do is ask themselves ‘what do you mean by ethical’ – it’s certainly not as easy as I thought when writing this post. Mrs Ermine’s approach seems largely in the ‘I don’t want to be in XYZ’ category

      I couldn’t find the category in Trustnet but Mrs Ermine might favour renewable ITs like these guys. That’s of course an affront to the principle of diversification – there seem to be general problems with diversification and ethical investing called out by Trustnet. If you knock out oil and gas and pharma and healthcare that’s a lot of economic activity ignored.


  16. I suppose it’s all about pragmatism – ethics always is. (e.g. Should I become a banking parasite and then donate all my money to charity, rather than have a real job and need all of it for myself?)

    I have a feeling it was Bluefield that had some sensible restructuring.

    There are two categories of interest: “Infrastructure Renewable” and “Environmental”. I think the former are ok but the latter are a bad idea.

    Re. the green infrastructure, It’s a bit of a shame you’re only thinking of them now, as they were the only infrastructure ITs that looked reasonable value several months ago; they seem to be catching up with the massive premiums of the standard trusts rapidly.

    Property and Infrastructure trusts are really hard to value – you don’t have the market telling you the worth of the assets so its all guesswork on discounted cashflow. I don’t trust them (though I suspect the massive premiums aren’t actually so bad as they might assume a higher discount rate than the one we probably will have.) I suppose it means you’ll have to spend some time digging about.

    Finally, one thing that probably points to infrastructure being a good investment as that it is moronic government types on the other side so it’s clearly them that gets the fleecing. (Remember these high yields come from our taxes in many cases and that we could have borrowed for almost nothing instead! Thanks Gordon!)



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