Like many people, Victor Smart wanted to take responsibility for the choice of businesses his money helps finance. Here, he shares the lessons from his quest to align his ethical principles with his investments.
I was galvanised into making my first environmental, social and governance (ESG) investment by the realisation that I had a pot of pension cash which, for all I knew, was invested in coal production, online gambling or worse. And, like many people, I had recently come to feel that I really should take responsibility for the choice of businesses my money is helping to finance.
The cash was sitting in a company pension scheme, in a fund administered by Standard Life. The trustees for the company scheme provide a list of 10 funds for members to choose from. When I checked, only one offered anything putting values above value, so choosing was easy. It took me less than three minutes on the website to transfer all my investment into the Standard Life Ethical pension fund.
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Then I started to explore where my money has ended up. I had only a vague idea of what sort of companies I expected to find. My personal predilection would probably have been for firms that are trying to slow the degradation of the environment; plus enterprises that in some small way might nudge us away from the current paradigm of capitalism, where power seems to lie with a few dominant firms, and where there is too much short-sightedness.
In the jargon, this makes me an impact investor – someone who doesn’t just want to finance mainstream business behaving ethically in a narrow sense, but seeks to help businesses do some good and move away from our current unsustainable model of capitalism.
So what did I discover? At the top of the list of the Standard Life Ethical pension fund is Bellway Homes, the big UK housebuilder, building everything from one-bed flats to “penthouses and prestigious executive houses”. Nothing too worrying here, although the group does emit thousands of tons of CO2 per year, and I wonder how sustainable it is for the few to live in penthouses and posh homes.
But it was the firm second on the list of holdings which startled me: retailer Boohoo. My impression is that Boohoo is a byword for the wastefulness of the fast-fashion industry; its business model has been widely criticised as unsustainable.
Further down the top-10 holdings is Fevertree, maker of premium-priced mixer drinks. Ninth on the list is a company I had not heard of called Grafton. Grafton, it turns out, is principally a builders-merchant business – but, significantly, it also owns Britain’s largest manufacturer of silo-based mortar for use in construction projects. A quick glance at its annual report discloses that Grafton’s C02 emissions per million pounds of revenue were 31.4 tonnes in 2019. And the firm has revenues of more than £2.5 billion. Go figure, as they say.
Standard Life ethical pension fund top holdings
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Standard Life responds that as a long-term investor in Boohoo, it has “worked closely with the company to improve their overall sustainability strategy.” It adds that the fashion retailer has built a new sustainability team focused on long-term strategy, covering its environmental impact, labour management improvements and greater transparency of its supply chain. Grafton, meanwhile, has over the past five years reduced emissions by nearly a quarter.
Since my pension trustees offer me no other ‘ethical’ alternative, I remain invested in this fund. But given a choice I would certainly opt for a rather different portfolio – something greener and maybe something that would move us towards a newer, more caring type of capitalism.
Chastened, I now turned to more promising territory in pursuit of something more in tune with my values. I headed for Triodos Bank, a company which signals virtue with a megaphone and talks happily of its investors being “part of a movement for change”. Indeed, it states: “The organisations we finance all believe in a fairer and better world, and want to make a positive and lasting impact on society, culture or the environment.”
I glanced first at the firm’s Global Equities Impact fund, invested in large companies. Once again perusal of the principal holdings was an eye-opener: included are global property firm Jones Lang LaSalle alongside Starbucks and Walt Disney. Big corporates like these may be signed up to ethical behaviours, but they are still very much driven by shareholder value. Walt Disney, for example, is embroiled in a row about furloughing more than 100,000 employees while keeping its executive compensation package.
Triodos argues that if large multinational companies begin to move in a more sustainable direction – even one step at a time – the wider impact on society and the environment will be significant. “Active stewardship is a key part of our impact investment strategy – we regularly engage in dialogue and other feedback loops with these companies to positively influence their business.”
The Triodos fund also invests in some other, more overtly green enterprises. One is Vestas Wind Systems, a Danish manufacturer, seller, installer and servicer of wind turbines employing more than 24,400 people globally. Another is a US firm called Xylem which is developing innovative water solutions using smart technology. At last I was making progress.
And the better news was that Triodos has a separate fund called the Pioneer Impact fund, providing access to smaller firms (Vestas and Xylem make the cut). The fund rates six out of seven for risk, but I have cheerfully taken the plunge.
It’s worth noting that among Triodos’ other products there is the chance to invest directly in particular enterprises, such as a brewery in Stroud or a wood recycling project in Bristol.
My next stop was an online investment platform showcasing a clutch of what it calls socially responsible investing funds. Low fees are a draw. Once again would-be investors need to do their homework. One of the funds listed, for example, is EdenTree Amity International, whose top holdings comprise the Silicon Valley titans Alphabet (parent company of Google) and Microsoft. Big tech giants like these tend to attract criticism over their dominant positions, the modest amounts of tax they pay in the UK compared with their huge revenues here, and their attitudes to privacy. But the situation is not black and white. Microsoft, for example, has recently pledged to becarbon negative by 2030. Still, I opted instead for the Threadneedle UK Social Bond fund, with holdings in entities such as Nationwide Building Society and Transport for London.
Finally, I gravitated to two funds that seemed likely to be genuinely congruent with what I sought. First up was Pictet Global Environmental Opportunities. The main holdings are in firms like Autodesk, Veolia and Thermo Fisher Scientific – big firms, admittedly, but still worthy.
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Smell the cheese
I also looked at Montanaro Better World fund. One of its holdings is Chr. Hansen, a global supplier of bioscience products based in Denmark, that makes enzymes for cheeses and so on. Montanaro claims it has been called “the most sustainable company in the world”, with a majority of its products aligned with UN sustainability goals. Also in the portfolio is Amplifon, an Italian firm and the world’s largest hearing aid retailer. Okay, so these are not quite the firms that will reinvent the market economy, but in an imperfect world I have invested here.
So what are the lessons from this quest? First, it’s important to understand what sort of investor you are: are you keen simply to avoid ‘sin stocks’ like tobacco, or do you want to put money in firms trying actively to find solutions to problems? Then, ask yourself what sort of values are driving you: do you place the emphasis on good corporate governance or environmentalism, for example? Above all, scrutinise the names of the actual companies you are financing through these funds. One person’s ethical enterprise may be another’s faceless, profit-hungry corporation.
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This article was originally published in our sister magazine Money Observer, which ceased publication in August 2020.
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