What Do “Ethical” Fund Managers Do?

So you have chosen to invest your savings in a way that takes ethics into consideration. You’ve decided that the best way to do this is via specialist fund managers. So what do these fund managers do, that other fund managers don’t?

The foundation stone for any ethically oriented fund manager is the acronym ESG – Environmental, Social, and Governance. Sometimes you will also see this approach described as Socially Responsible Investment, or Sustainable Investment.

Let’s have a look at some of the things a fund manager might consider:

Environmental – climate change, impact on the local environment, production of hazardous waste, sustainability.

Social – gender and cultural diversity, human rights, community impacts, animal welfare.

Governance – management structure, employee relations, reporting and disclosure.

Fund managers will either conduct research themselves, or source research from specialist research houses. Most funds will have a negative screen, which means they will not hold shares in companies operating in certain industries. Provided a company does not get caught in one of these screens, the fund manager is free to invest in it.

Perpetual’s Ethical SRI Australian Share fund is a successful example of an ethically managed fund. It applies a negative screen to eliminate companies deriving more than 5% of revenue from alcohol, gambling, tobacco, uranium, coal-seam gas and the weapons and armament industries, and assesses performance in areas such as human rights, the environment, occupational health and safety, work and labour standards, animal rights and corporate governance. The negative screens bring the investment universe down from about 450 potential stocks to approximately 200 companies. The fund managers will then build a portfolio from these 200 stocks, using normal financial assessment criteria.

In addition to negative screens, some fund managers might also apply a positive screen. This would lead them to favour stocks that they believe are doing positive things in the ESG space. A company developing renewable energy might be an example of this.

Most fund managers that offer specific ethical products, would be signatories of the UNPRI. This is the United Nations Principles for Responsible Investing. Its goal is to understand the implications of sustainability for investors and support signatories to incorporate these issues into their investment decision making and ownership practices.

How can Guidance help?

We are a financial planning firm that creates bespoke investment solutions for our clients. If you want your retirement savings invested fossil fuel free, with no alcohol of gambling exposure, or with a broad ethical overlay applied to all investments held, we can provide you with a solution. We can access a range options to suit your investment balance, and the degree of involvement you wish to have.

Ethical Investment – take control, make a difference.