Finding ethical companies to invest in

I work for a company which takes pride in its ethics and values. So when I got chatting – as one does – with a younger colleague about pensions/investing recently she asked me how to invest in ethical stock market companies. As I’ve thought about this subsequently, I have realised what a minefield this topic is.

Let the ethical company cast the first stone

What’s unethical?  How about each of the following activities, for instance.

• Selling bad products
  • Weapons/firearms (military weapons, firearms, armour, fishing tackle?)
  • Drugs (tobacco, alcohol,  pharmaceuticals?, chemicals?)
  • Pornography (adult publishing, violent computer games?)
  • Gambling? (betting, gaming, financial services?)
• Unethical business practices
  • Conducting animal testing
  • Human rights abuses
  • Unethical sourcing, e.g. encouraging child labour, conflict
  • Predatory behaviour (collusion, market-rigging, loss-leading, aggressive selling?)
  • Practising dehumanising employment practices
  • Dodging taxes
• Harm to the environment
  • Mining/extractive industries
  • Processed foods
  • Car manufacturers?  Airplanes?  Airports?
  • Supermarkets?

Incidentally, the criteria above are roughly those used by sharia funds.  Sharia also can exclude media/leisure stocks, which for the moment I am regarding as good clean fun.

I’ve done a quick scan of the FTSE-100 companies and grouped them into High/Medium/Low on the ethics front.  The good news?  Two thirds of the companies landed in ‘High’ ethics.  The bad news?  They accounted for only ~40% of the market cap.

• FTSE-100 has relatively few ‘evil’ sectors in it.  No porn, no narcotics.  No gambling/gaming (which, in my book, is not per se Low ethics, but I know many readers will disagree).  Barely any automobiles, which I know many readers wouldn’t regard as unethical even despite the recent news about VW.  £90bn of tobacco, which I think almost everybody would agree can be graded ‘Low’. And some defence/military, which I also graded ‘Low’, amounting to £30bn. This lot amounts to about 7% of FTSE-100.
• There is a lot of mining/oil/commodoties.  About £350bn worth of FTSE-100 are oil, gas, or mining stocks; these amount to about 20% of FTSE-100.  I’ve graded these ‘Medium’.
• There is a lot of banking.  £250bn, or 15% of the total.  How ethical is this?  My colleague would probably accept investing in this sector, but it would be through gritted teeth. I’ve graded them ‘Medium’.
• There is £190bn of food/beverages, or 10% of the total.  What’s unethical about this?  If you don’t want to invest in alcohol businesses, you’re ruling out £90bn/5% of FTSE-100. And while opinions about other food businesses differ, when you consider some of the practices of the big FMCG businesses like Unilever, or Reckitt Benkiser, you might well get a queasy stomach.  I’ve graded all these businesses ‘Medium’.
• Slightly higher up the scale is Retail.  I’ve graded some of these ‘High’ ethics and some of them ‘Medium’.
• The big ‘high’ ethics sectors?  Pharmaceuticals (£150bn), tech/telecoms (£100bn), utilities (really?) (£70bn), leisure (£60bn), media (though not according to sharia – see above) (£60bn), insurance (erm…) (£106bn), and support services (£60bn).  Many of these companies are not exactly Angels PLC.  But they don’t immediately scream out at me ‘ethically challenged’.  Doubtless if I worked a bit closer to these industries I might have a different view.

So, if you want to avoid ‘sinful’ companies, miniing/extractive companies and banks, you are ruling out almost 50% of FTSE. But you’re still left with 60+ companies to choose from, including some fine blue chip names such as GlaxoSmithKline, Vodafone, AstraZeneca, Prudential, BT, National Grid, Aviva, WPP, L&G, ARM, Pearson, M&S, Next and Royal Mail.

What about ethical ETFs?

What if you haven’t any interest in investing, believe in the logic about passive, low-fee investing, but want to avoid low ethics companies.  Aren’t there some ethical funds / ETFs to choose from?  Yes, there are.  There is even an Ethical Investment Association (EIA) devoted to the concept in the UK.

Does investing ethically compromise returns?  I think opinions differ on this, but certainly there are some respectable proponents of the view that investing ethically enhances returns. And according to NEST, ethical funds in the last three years have outperformed conventional funds.

What do you think? Have I missed any arguments?  Would you be interested in seeing my rough-and-ready ethical grading of the FTSE-100?  Has anybody done a performance analysis they can share here?

I must say on a personal note I do not constrain my investing by ethical filters.  I am happy to invest in all the companies in FTSE-100 and indeed do so via FTSE-100 ETFs as discussed extensively on this blog.

Other reading:

• Half the FTSE-100 is ‘unethical’ – Morningstar
• Does investing ethically really mean you sacrifice returns?
• How is your auto-enrolment pension faring?