But just how ethical are so-called ethical funds? Is it really worth paying the typically higher fee (justified by the need for an ethics committee) and enduring typically lower performance when the fund in which you are investing might in fact be pretty similar to its regular counterparts in terms of holdings?
Despite numerous and varied examples of what many would define as serious malpractice over a sustained time period, three companies appear in the top 10 holdings of a number of ethical funds which boast in their investment criteria that a firm will be excluded if it engages in bad business activities.
Slippery operator
First up is Royal Dutch Shell, which has been involved in a host of scandals. In 2004 it was found guilty of overstating its oil reserves resulting in a £65.7m fine paid to the US securities and exchange commission and £17m to the Financial Services Authority.
In 2009 it was fined £29.4m after a contractor bribed Nigerian customs officials, and it made a $15.5m humanitarian settlement to avoid a lawsuit in relation to its alleged provision of logistical support to the Nigerian government which was acting against oil protestors. It is currently embroiled in a price-rigging case brought by the European Commission.
Dirty laundry
Next up, HSBC was fined £1.25m last December for allowing South American drug cartels to launder billions of dollars. In March this year, a similar case was brought against it by the Argentine tax authorities.
This is not the first time it has been caught up matters of this kind; in both 2003 and 2010 the US regulators ordered the bank to strengthen its anti-money laundering practices, and the bank was warned after continuing to ignore suspicious transactions.
Drug money
Last but not least is GlaxoSmithKline. A top ten holding of 357 funds, according to FE, nine of which are ethical funds.
GSK’s numerous counts of misconduct were discussed here, and last week the pharmaceuticals giant admitted its executives in China had broken the law following accusations they have been bribing doctors to prescribe the firm’s drugs.
Aberdeen approved
Aberdeen’s ethical investment criteria is explicit on its requirements when it comes to malpractice. It states: “a company will automatically fail to be considered for investment if it has a history of poor business practices.”
Yet all three companies above are in the top 10 holdings of the Aberdeen Responsible UK Equity Fund, so how does the firm justify this?
A spokesperson said: “The fund uses an engagement overlay for the areas of corporate governance, environment and labour/human rights.
“The benefit of using this type of SRI screening is that Aberdeen’s engagement process is inclusive, not exclusive, meaning that we view each company based on its own strengths and weaknesses in these three areas. No company will be initially excluded from the portfolio based on these three criteria, so that, as owners, shareholders are able to influence every company in the portfolio (through the SRI team) to be a better corporate citizen.”
“With regard to the issues highlighted, these are issues that the SRI team are currently aware of and many of which have already been raised with the companies as part of our on-going engagement process (the SRI team conducts engagement with all companies held across the global buy list, regardless of whether or not they are held in the engagement or negatively screened portfolios). However, due to the screens adopted by the Responsible UK Equity Fund, as described above, these companies continue to pass.”
F&C ready
Meanwhile, F&C’s Stewardship committee takes a stance on corruption and its investment policy states: “Stewardship expects companies operating in countries where there is a high risk of bribery and corruption to have strong policies against participation in these. Stewardship will favour companies that commit to anti-corruption practices.”
In light of this it’s surprising to find both the F&C Stewardship Income Fund and Growth Fund hold HSBC and GSK, both of which have been found guilty of corruption and both of which have exhibited questionable business ethics.
F&C responded: “The controversial events at HSBC that arose in 2012 triggered a review of HSBC at the September 2012 meeting of the investment sub-committee, in which the committee reviewed the charges and allegations against HSBC and how the company had responded.”
The Committee concluded the bank had taken adequate action to rectify the latest issues following its review.
A spokesperson said: “Stewardship believes it has a duty to remain watchful and to engage with company management and outline investor expectations of a responsible bank. As a long-term investor, Stewardship believes it has a responsibility to leverage its influence to press companies that are already held to reform. In the case of HSBC, this engagement to date has been well received and we hope it will be fruitful and enable a new standard to emerge for responsible banking.”
Silence speaks volumes?
Teachers Provident Society includes the following objective in its ethical investment strategy: “[The fund] includes only those companies who operate best practice in corporate governance.”
Its Sovereign Ethical Fund, however, includes two holdings in Royal Dutch Shell, alongside positions in both HSBC and GSK. A spokesperson was unable to comment on the holdings and how they align with the fund’s investment policy.
So what is the lesson here? When investing for genuinely ethical reasons it seems to be important to look at the fund’s holdings and how these positions are justified when the company’s track record appears to be in conflict with the selection criteria; it could be that your ethical investment may not turn out to be quite so in line with your principles as you had hoped.
