Ethical funds: ethical in name only?

Aberdeen, Legal and General, and Prudential are among the fund houses running 'ethical' funds that actually hold huge investments in fossil fuel companies, a specialist in green and ethical investment has claimed.

According to ethical investment advice firm Castlefield, many funds that label themselves 'ethical' often hold large slices of companies that many investors might not associate with socially responsible investing.

In many cases they also use outdated negative screening methods.

Negative screening is a selection method whereby companies are vetoed by the investment manager for being associated with undesirable practices - such as arms dealing, alcohol sales, animal testing or having a high carbon footprint.

MARKETING PLOY

Critics such as Castlefield say negative screening is a marketing ploy to make investors feel better but has no significant impact on the world. Positive screening, on the other hand, is when investment firms support companies that take active steps to be more socially responsible or environmentally friendly.

According to Castlefield, a good ethical fund manager will actively involve itself with the companies in which it invests, putting pressure on them to be more socially and environmentally responsible.

Castlefield picked out the five worst 'spinner' funds - those that invest in fossil fuels or use poor negative screening despite marketing themselves as ethical.

The five funds are:

  • Aberdeen Ethical World fund: Castlefield claims the fund not only has £6.9 million pounds invested in major shale oil extractor EOG Resources, but has also performed poorly.
  • Legal and General Ethical Trust: uses light ethical negative screening and has no involvement with the companies in which it invests.
  • Prudential Socially Responsible fund: top 10 holdings include Shell and Rio Tinto, and the fund itself has delivered poor performance.
  • Sovereign Ethical fund: uses negative screening but still holds 7 per cent in oil and gas, and has not performed particularly well.
  • Virgin Climate Change fund: features Shell among its top 10 holdings making up more than 4 per cent of the fund. Castlefield also criticised a general lack of information for investors.

'Our review found that many ethical funds have not moved beyond negative screening,' says Castlefield partner John Ditchfield. This is an 'avoidance-based approach which is rather outdated', he adds.

The research comes as a movement to divest from fossil fuels gains leverage. Some experts argue that climate change science shows not all fossil fuels can possibly be burned if we want to avoid catastrophe, and that there is therefore a growing investment case to pull out, in addition to the ethical arguments.

Castlefield also commended five fund groups for their positive selection methods and apparent concern for making a positive social and environmental difference. The five include WHEB Sustainability, Alliance Trust Sustainable Future UK Growth, Premier ConBrio BEST Income, Quilter Cheviot Climate Assets and Impax Environmental Markets.

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