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?
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.
4 thoughts on “Finding ethical companies to invest in”
We had a debate about this several months ago:
You might be surprised to know that I don’t invest in sugar companies e.g. Tate & Lyle, although financially speaking they have come up high on my automated watch lists for value stocks on several occasions. I know there are a couple of Stevia/non-sugar healthy sweetener (not dodgy stuff like aspartame) companies on AIM, but I haven’t felt compelled to invest in them as of yet.
What I can never understand is why people say they hate smoking and think it’s the worst thing ever, and then invest heavily into Reynolds, British American, et al. To me, that just seems hypocritical. You hate the product and wish it didn’t exist, but you want the company to sell more so you can earn more dividends?! Um, sorry, don’t follow the logic
Pharma is really hit and miss too… some of the practices of big pharma are really dodgy, but then they save lives and help people at the same time. Same goes for RB and ULVR who have been accused of all sorts of things, but then you love a bit of cough mixture when you’re sick and you wash your hair and body with shampoos and soaps and gels…
I agree, it’s a minefield!
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I wrote out a big reply to this and just before I hit post I read it back and realised I sounded like a complete idiot. I don’t have a problem in investing in anything (in the major markets I mean, not in toppling African governments like Mr Thatcher) but when I tried to justify and rationalise this reasoning it sounded very hypocritical. I think for most people it’s an easy question to answer but a hard one to give a concrete explanation for.
To touch on TV’s comment I personally would have no problem investing in a tobacco firm even though I don’t smoke myself and would fully support a public smoking ban. Is that hypocritical? Yes probably but at the end of the day I invest to make money and if somebody wants to smoke and pay me in dividends to do so then, for me, I am happy to take that money. Where does that thought process end? Defence? Big Pharma? Perhaps I’m guilty of not asking too many questions about exactly where my money is going.
Having said all that and gone round in circles I invest in index funds anyway so I don;t have to worry about making those difficult choices :p
A really interesting question though that opens up a whole big debate. I’m interested to see what other peoples thoughts are. (I probably still sound like an idiot)
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I’m like you on this FIb – I invest in oil companies, in alcohol businesses, gambling businesses, mining, have investment trusts that invest in tobacco companies, invest in pharmaceuticals etc. Some of what these companies stand for goes against my own beliefs but I guess my beliefs are not so strong that I would stop investing in them – or rather, my desire to make money from them is stronger. Hmmm..that doesn’t make me sound like a very good person, does it? To try to counter this, I try to do what I can in other aspects of my life, donate to charity, religiously recycle and try not to be wasteful of resources such as water etc.
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Hi FvL, good topic, lots of people are interested in investing ethically judging by my email inbox.
Quick tip — while your blog is still fairly young, I’d go through all your posts and put them into categories (you have them all as ‘uncategorized’ currently.) Not only will this modestly drive user engagement (because people will want to see all you have to say about Property, Stocks, or in your case Caviar 😉 ) but it may also help a bit with the Search Engines. 🙂
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