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Good as gold? Ethical investing is not the no-brainer it seems

Who decides what is immoral and what isn’t? And why not make money in order to address other societal ills?

2 March 2019

9:00 AM

2 March 2019

9:00 AM

The 1980 cult film The Blues Brothers focuses on Jake and Elwood’s quest to save their convent orphanage by raising $5,000 by ethical means. Given the carnage that ensued in achieving that aim, holding up a petrol station might, on the whole, have been better for society.

The Scottish Episcopal Church may well sympathise. Since 2013, it has opted out of direct investment in companies that deal in armaments, fossil fuels and tobacco. But its investment managers have concluded that it has suffered lower returns and greater volatility as a result. At the church’s general synod in June it will propose returning to a more mainstream strategy. Its current policies mean that as well as eschewing large share-holdings in certain companies, it cannot invest in low-cost index tracker funds which, of course, have a smattering of these companies throughout.

Ethical and green investing has become big business in recent years. Dozens of ethical funds have been launched, now accounting for just over 1 per cent of money invested in funds overall. Just this month, FTSE Russell launched a new FTSE 100 ‘ESG’ index, which uses 300 indicators to assess a company’s performance on environmental, social and governance issues and picks out the best 100 performers from the 600 or so in the FTSE All Share index.

But the sector suffers from a fundamental fault: defining what is and is not ethical is something of a minefield. According to some, 50 per cent of FTSE 100 stocks could be considered in some way ‘immoral’. Weapons manufacturing is a much-frowned upon sector but should this sanction apply if the weapons are being used by a UN-backed force of peacekeepers?


Most people agree that testing cosmetics on animals is immoral, a practice banned in the EU, India, Israel and Norway. However, goods sold in mainland China are required by law to be tested on animals, so if L’Oréal or P&G sell their products in China, they cannot claim them to be cruelty-free. Pharmaceutical companies on the other hand are obliged to carry out testing on non-human animals prior to human clinical trials. But these treatments save lives — so how do you balance those factors?

Petroleum companies like BP and Royal Dutch Shell are often excluded because fossil fuels contribute to climate change. But if you drive a car or use mains electricity which increasingly comes from gas, this stance might be regarded as hypocritical, particularly when you consider that BP is probably a good deal more conscientious about its environmental obligations than, for example, Gazprom.

Mining companies often wreak terrible damage on local environments, so companies like Rio Tinto or BHP are considered beyond the pale by some funds. But this isn’t so simple either. The magnets used in some wind turbines require rare-earth metals such as neodymium and lanthanum, which are often mined in appalling conditions in China, leaving behind toxic waste. Similarly, a Toyota Prius has a kilo of neodymium in the motor and each battery has more than 10 kilos of lanthanum.

The big tech companies responsible for much of the growth in the stock market over the past decade don’t exactly have a clean bill of health, either. Apple has long been under fire because of the working conditions in its major Chinese supplier, Foxconn, while Amazon faces similar criticism about conditions for its UK workforce. Facebook’s use of customer data is attracting increased scrutiny from regulators, while its Instagram subsidiary has been under fire regarding images of self-harm.

Arguably the most ethical of the big technology firms is Microsoft, which offers charitable discounts on its software and services. A further ethical complication is that the Bill and Melinda Gates Foundation is giving away 99 per cent of the wealth accrued from the company to try to eradicate diseases and provide education to the developing world. Yet like many companies, Microsoft makes use of Ireland’s bargain-basement corporation tax rates. Is this moral?

Finally, can any company escape accusations of abetting immoral acts? Who runs the arms manufacturers’ pension funds? Who sells them electricity? Who ships their products? And who defines ‘immorality’? If you’re a member of the temperance movement, you may regard the drinks giant Diageo as being engaged in immoral behaviour. If you are a vegan you might find it hard to regard any mainstream food company as ethical.Is there a single large company that does not serve meat in its canteens?

The next question is: can ethical investments bring home the bacon? Launched in 2001, the FTSE4Good index excludes companies involved in tobacco, weapons and coal extraction. Performance is slightly worse than the sector average, returning roughly 80 per cent of the gains of the FTSE All-Share over ten years (although it has performed slightly better over the past 12 months). It is too early to tell how the new FTSE 100 ESG index will perform, but given the greater diversity of sectors, the performance should certainly be less volatile.

But if you want to experience the warm glow of having done good there is another option: take the maximum possible gains from your investments and spend them in a way that promotes the public good. Sin taxes have long been used by the government as a way of raising money because the greater the consumption of tobacco and alcohol, the greater the need for money to pay for their consequences. Perhaps the Episcopal church should invest in these sectors so that it can ‘launder’ what some would see as dirty money into cleansing souls.


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