The rise of socially responsible investing

There are negative ways of being a moral investor, leaving out areas that could harm. There are positive ways of being a moral investor too.


There is much discussion in the investment world about how investors should take social, environmental and ethical issues into account when shaping a portfolio. Trustees of pension funds and charities have to act in the best interests of their organisation, which has usually been interpreted as maximising returns for a specified level of risk. Choosing from a wide-ranging universe of asset classes and individual shares, bonds and properties is part of the normal means of trying to secure that good return.

It is also usually agreed that a charity can limit investment in areas or individual investments that undermine its charitable purposes or damage its reputation in ways which could harm fundraising and carrying out its duties. A medical charity would have a good case to rule out investing in cigarette manufacture given the strong medical advice to people not to smoke. An environmental charity would have a good argument if it ruled out investing in a company that was proposing certain kinds of extractive activities in landscapes the charity thought worth protecting. How much wider trustees can go in expressing moral views on investment is more arguable, I am told by lawyers.

Individuals are, of course, free to express their own views as they see fit when setting limits on investments in their portfolios. An investment adviser has a duty to tell them if they wish to restrict investment choice it could damage returns significantly, but will work within the preferences and constraints they choose. You do not have to buy shares in companies you dislike or in business areas you think are wrong.

Complex issues

During the debates within the investment world numerous issues have become interwoven. There is the view that selecting well-governed companies is not only the right thing to do but also likely to lead to superior performance. People have produced methods of screening companies for their track record on having a strong board and management structure, on being good employers, on being good neighbours in every place where they trade, on treating health and safety as a crucial matter and on behaving in an open transparent and honest way. Some of these matters can be quantified, but many entail some element of judgement. Different evaluation systems can produce different answers when drawing up lists of good companies.

Companies that are bad employers find it difficult to recruit and retain talent. Companies that are lax on health and safety can fall over with a big disaster which undermines the business. Companies that have an over-strong CEO with no independent chairman may lack the second opinion or the intelligent challenge to strategy needed to keep the company on a good course.

There is the common opinion that climate change is a major challenge justifying using environmental criteria when assessing potential investments. Again, differing ways of screening have been pioneered. Some say investors should not invest in the oil majors as they still earn so much revenue from selling fuels based on hydrocarbons. Others give credit to some of the oil majors for their plans to diversify, often leading parts of the green revolution with their own commitments in renewable energy. The world is going to find it tougher to remove its dependence on oil and gas without the help of those large companies that currently dominate its supply.

Negative and positive screening

There is the view that a range of companies in a range of sectors make money out of harmful activities. There is the sale of offensive weapons, the production of items that become addictive and harmful, and the encouragement of gambling on many lists of “sin” investments that people might like to exclude from a moral fund.

There are negative ways of being a moral investor, leaving out areas that could harm. There are positive ways of being a moral investor, putting more weight in a portfolio on those areas and investments that promote the better life as the investor sees it. One of the problems for the industry is that people have very wide-ranging and different views on what is acceptable business activity and practice.

Investment managers are getting more expert at understanding what can be done to incorporate some such views into a portfolio. Gradually, funds are being set up that cater for people and institutions most worried about the environment or good corporate conduct. They will all have to make judgements, and will base much of their screening on numbers. This always leaves difficult cases either side of the qualifying line. Investment specialists will need to be honest with clients about both what can be done to express a moral view, and what grey areas remain given how interrelated the business world is. You can screen out tobacco manufactures, but that still leaves the banks, shops and others who help them in the portfolio.

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John Redwood is Chief Global Strategist at Charles Stanley & Co. Limited, which is authorised and regulated by the Financial Conduct Authority.

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