What do you lose by being 'ethical'?

chamberino

Ethical in commas because it's a bit of a nebulous term that can mean a lot of things. For me it means no investment in fossil fuels or other environmental damage, bad labour practices as well as more obvious things like human rights abuses, arms etc.

Someone told me in another thread that choosing ethical investments would earn less money. I'm interested in what that looks like in practice. Say I invested 10k over 10 years, what would I lose out on (if at all) through an ethical investment?

to_jackie_too

I'm not convinced that unethical companies have higher expected returns than ethical companies.

If there were a sufficiently large proportion of invested capital that shunned unethical investments, then it should (at least in theory) have the effect of driving down the (relative) price of unethical companies (compared to ethical companies), which would increase the (relative) expected returns for unethical companies. But I doubt there is a large enough weight of ethically-invested capital to achieve this effect. Especially since it is open to the managers of unethically-invested capital to put more money into the unethical companies to compensate.

What you do lose by being ethical is some diversification, because you will be largely shunning certain sectors of the equities markets. You would expect this to result in significant periods — which could last for decades or longer — of under- or over-performance (i.e. it could go either way) from ethically invested capital compared to broad market indexes. And you'd probably also expect more volatile returns.

For instance, if we come to our collective senses and leave most of the fossil fuels already discovered in the ground, then you could get significant out-performance from avoiding fossil fuel companies. In some circumstances, being ethical may mean seeing the writing on the wall for an unsustainable business model.

But some unethical business models can run and run. And if a business is unethical because it is exceptionally exploitative, that may also make it exceptionally profitable.

Another thing you lose by being ethical is that you'll pay higher management fees for ethical funds. At least compared to the non-ethical approach of holding cheap passive funds — this may not apply you were otherwise going to hold non-ethical active funds.

Malthusian

to_jackie_too wrote: »

For instance, if we come to our collective senses and leave most of the fossil fuels already discovered in the ground, then you could get significant out-performance from avoiding fossil fuel companies.

Unless of course the fossil fuel companies use the pile of cash they have earned from burning fossil fuels to invest in renewables and successfully maintain their dominant position in the energy markets. Or renewables companies successfully develop clean energy but go bust in the attempt, after which BP and Shell buy their assets for a song, meaning that unethical investors profit from renewables at ethical investors' expense.

There's no evidence that anyone can consistently beat the market through this kind of crystal-ball gazing.

Anyone who sells ethical investments on the grounds they'll do better, either by selectively quoting past performance, or by making crystal ball statements about peak oil, is a charlatan. If on the other hand you are buying an ethical investment because it helps you sleep easier at night, and are happy with the fact it will add risk for no reward and higher charges, there's nothing wrong with that.

Alternatively you can use a low-risk index-tracking portfolio without ethical criteria, and donate some of the returns to charity. You could even virtually follow the performance of an ethical fund or sector, work out the difference with your own portfolio, and use any excess returns you earn from being "unethical" to fund education in Africa or mental health services in your local community or whatever cause is closest to you.

(If you don't get any excess returns and the ethical fund or sector consistently outperforms your chosen low-cost portfolio, I suppose that just serves you right. But regardless of the investment merits of renewables, the higher charges and rewardless added risk of ethical funds mean it's unlikely to happen.)

232607

Historically the 2 area’s with the highest growth have been the drinks & the tobacco industry.
Choosing a ethical fund may rule these out so you are ruling yourself out of the highest growth area’s.
Plus what 1 person see’s as ethical another may not so it becomes difficult to align yourself to an ethical fund when the principals are generic.
IE, why would you not want to invest in the drinks/tobacco industry if you enjoyed a tipple & a fag every now and then.

Aminatidi

One point of view that I have heard is that it's arguably better not to focus on being (overly) ethical in what you invest in but focus on what you do with the returns that you make as you arguably have more influence with those.

ColdIron

chamberino wrote: »

Say I invested 10k over 10 years, what would I lose out on (if at all) through an ethical investment?

Choice. You are fishing in a smaller pool of investment options. This may or may not work in your favour

BLB53

Ethical or ESG investing is quickly becoming more mainstream as the investment world latches on to the importance of our climate emergency. Many large fund managers, pension funds and sovereign wealth funds are starting to ditch fossil fuel companies from their portfolio as they are risky 'assets' as we transition to low carbon alternatives such as wind and solar.

I would suggest over the coming decade, fossil-free funds will become the norm and those funds which fail to move with the new times will underperform the clean funds.

AnotherJoe

chamberino wrote: »

Ethical in commas because it's a bit of a nebulous term that can mean a lot of things. For me it means no investment in fossil fuels or other environmental damage, bad labour practices as well as more obvious things like human rights abuses, arms etc.

Someone told me in another thread that choosing ethical investments would earn less money. I'm interested in what that looks like in practice. Say I invested 10k over 10 years, what would I lose out on (if at all) through an ethical investment?

How can anyone know ? You are asking what will happen to investments over the next ten years which apart from the nebulous criteria also depends on the world economy.
I'll give you my opinion which is that "traditional" fuels are on the way down and that "alternative" fuels, eg wind, solar,power storage and the like, are on the way up and oil coal and later gas, on the way down. Many big investment funds are already stating they will or are pulling out of investment in FF's. There are obvious ways to invest in AE , you can invest globally minus oil and coal and associated areas, there are ETFs which track this, or in "alternative" energy, I'm doing the latter.
That's only one of your ethical areas of course. Don't know how you'd not invest in the others other than ethical funds.
Will they do better in the next ten years than FF's? That's my bet, seems hard to believe that FF's will do well.

verybigchris

I'm yet to find an "ethical investment" that actually has any ethics.

Just out of interest, I googled "best ethical funds" and top result was "Kames Ethical Fund". Looking through their top 10 holdings in size order we have:

1) RELX - boycotted by scientists around the globe after accusations that the high prices they charge for scientific journals inhibits the sharing of important research
2) Aveva - supply oil and gas companies, so not great if you want a green slant to your ethics
3) Coca-Cola - hahahahahahaha
4) Prudential - seem okay to me
5) GB Group - being monitored by the ICO for data they've supplied to political parties (also the CFO's wife has just sold a shed load of shares so I wonder what she knows that the market doesn't?)
6) Sage Group - great software, horrific pricing structures
7) John Laing Group - seem okay to me
8) Homeserve - done for mis-selling and breaking cold-calling rules (to be fair that's historic and may not be a reflection of the current business)
9) Diploma PLC - seem okay to me
10) Unite Group PLC - wouldn't touch student accommodation with someone else's bargepole

Before making any ethical investment it's worth doing a similar exercise. If you can find a fund that matches your ethics I'd be amazed.

to_jackie_too

Malthusian wrote: »

Unless of course the fossil fuel companies use the pile of cash they have earned from burning fossil fuels to invest in renewables and successfully maintain their dominant position in the energy markets. Or renewables companies successfully develop clean energy but go bust in the attempt, after which BP and Shell buy their assets for a song, meaning that unethical investors profit from renewables at ethical investors' expense.

Firstly, I didn't say that fossil fuel companies are overvalued. Because I didn't express an opinion on whether we will actually (do the sane thing and) leave 80% of fossil fuels already discovered in the ground. My opinion was just that, if we leave those fossil fuels in the ground, then the FF companies are currently seriously overvalued.

Current valuations of the companies are based on the assumption that none of it will be left in the ground (or at least: that it is a very low probability event that we will leave any of it in the ground). Reserves are valued based on the price of what might be extracted, less estimated costs of extraction, with deductions for the time value of money and project risks. At no stage do analysts ask: is this reserve likely to be among the 20% we will actually be extracting, or among the 80% we won't? — Because the latter is worth precisely nothing.

How successfully FF companies invest the cash they've already generated, or will generate (even from that useable 20% of remaining reserves), does also affect their valuation. But it's a much smaller factor.

There's no evidence that anyone can consistently beat the market through this kind of crystal-ball gazing.

I agree. And I absolutely don't know what we (as a society) will do about fossil fuels.

However, either way, I don't see the case for owning FF companies now. Either we leave most of the FF in the ground, and the companies are very overvalued. Or we burn it all, and we're all dead anyway, so it hardly matters how my investments do.

I do still hold some FF companies via collective investments. I need to look into practical ways to change that (i.e. with the minimum reduction in diversification and minimum increase in costs).

Kentish_Dave

chamberino wrote: »

Ethical in commas because it's a bit of a nebulous term that can mean a lot of things. For me it means no investment in fossil fuels or other environmental damage, bad labour practices as well as more obvious things like human rights abuses, arms etc.

Someone told me in another thread that choosing ethical investments would earn less money. I'm interested in what that looks like in practice. Say I invested 10k over 10 years, what would I lose out on (if at all) through an ethical investment?

You lose choice, and diversification, both of which are a negative.

I don’t really understand what difference someone thinks they are making by, for example, not buying shares in BP. This doesn’t take money from BP, and doesn’t reduce fossil fuel usage, so what’s the reason?

Not giving them money by not buying their products seems a better route, but it’s a rare ethical investor who doesn’t then fly somewhere once in a while.

It seems more about being able to be smug at dinner parties than making the world better in many cases.