What do you lose by being 'ethical'?

AnotherJoe

Kentish_Dave wrote: »

You lose choice, and diversification, both of which are a negative.
I don't think it's a negative not to invest in something you think will do badly (either absolutely or relatively ). I wouldn't invest in a company that made car exhaust systems for example because their whole market will be gone in 20 years time and collapsing in 10
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?

In my case the reason would be that I think a Pound invested in for example a S&P global clean energy ETF will in the long term return more than the same Pound invested in BP, and since I only have a limited number of Pounds why would I put any of them in BP. And I agree with tjt regards stranded assets, I don't think the possibility (certainty IMO) of that is currently fairly priced into FF companies. I don't buy the mantra that Mr Market knows everything and everything is fairly priced at all times so yep, I do think I have an edge by investing in S&P energy instead of BP.
Whether it's "ethical" to invest in it instead of BP is a different matter.

chamberino

Kentish_Dave wrote: »

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.

Companies care about their stock price though don't they? If a major companies stock falls it tends to be big news, so doesn't it have influence on their behavior?

Is there an example of how well an ethical fund has performed to a regular fund? Is it impossible to say whether the difference is closer to 2% or 20% etc?

Prism

chamberino wrote: »

Companies care about their stock price though don't they? If a major companies stock falls it tends to be big news, so doesn't it have influence on their behavior?

Is there an example of how well an ethical fund has performed to a regular fund? Is it impossible to say whether the difference is closer to 2% or 20% etc?

You could compare the Fundsmith performance with their sustainable version. Its pretty similar

https://www.fundsmith.co.uk/home/fund-factsheet
https://www.fundsmith.co.uk/global/sef/fund-factsheet

Also interesting is what they class as ethical/sustainable

https://www.fundsmith.co.uk/global/sef/sustainability-factsheet

Voyager2002

Different people have different ideas about what is 'ethical'...


Personally, I refuse to touch tobacco stocks. These are constantly recommended for steady growth, sustained dividends and a stable share price, and so on purely financial terms would have a role in most portfolios.Eliminating them probably means that for any given target return you have a greater degree of volatility: impossible to say how much, and obviously there is a chance that increased volatility could leave you better off!

On the flip side of the coin, the best-performing components in my portfolio recently have been renewable energy. Of course to some extent this is fashion, since prices in this sector were considerably higher a decade ago than now, but have been a lot lower in the meantime. No idea what will happen to prices in the future, but the underlying businesses are profitable; protected from competition; and government policies in most major markets mean that they are more or less guaranteed to be able to sell all they produce at rising prices while facing declining costs.

Some people might say that investing in Russia, Brazil or China, is unethical: others would avoid them on risk grounds. Back in 2010 I took the possibly unethical decision to invest in Brazil and prices have never been as high since as when I bought. The election of Bolsanaro saw prices shoot up with the promise of a business-friendly government, and that was my cue to sell: I would not want to benefit from practical fascism, and in the event that may have been the right decision on purely financial grounds as well.

Malthusian

to_jackie_too wrote: »

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).

Not true. Divestment is priced in.

If the switch to renewables takes place more quickly than the market currently expects it to, then ethical portfolios will outperform, and if it takes place more slowly, they will underperform. I suspect we agree there is no evidence that anyone can consistently beat the market by guessing which is the case.

chamberino wrote: »

Companies care about their stock price though don't they? If a major companies stock falls it tends to be big news, so doesn't it have influence on their behavior?

If an ethical investor sells their BP shares then a non-ethical investor buys them.

If the price they exchange the shares at reduces because fossil fuels are going to be left in the ground and therefore future profits will be lower than the market previously expected, there will be an incentive for BP's board to stem or reverse the damage and boost their remuneration by e.g. pivoting to renewables. But this incentive would exist for the managers whether someone was selling as an ethical decision or not. The driver is the fall in future profits. The lower demand for the shares is a symptom, not the disease.

There is an argument that an ethical investor should continue holding BP so they can help apply pressure on BP managers to make exactly this decision. I have no strong feelings either way. Whether big energy companies pivot to renewables or continue burning !!!!!! until the planet chokes depends on which makes more money and the competence of the directors, not who holds their shares. Money talks.

The primary responsibility of directors is to increase the company's profits, not try to persuade investors to buy their shares for non-financial reasons. They're directors, not analysts or brokers. If you're trying to boost the share price by increasing demand for the shares in the company you manage without increasing its profitability, you might as well put on a top hat and a red waistcoat and start singing terrible showtunes. Directors are only responsible for bigging up the company when the company is trying to raise new investment via a share issue or other means.

"Big company's share falls" isn't news, it's dog-bites-man filler for a slow news day.

edgex

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 could buy a solar pv system for your home

[Deleted User]

https://literature-lgim.huguenots.co.uk/srp/documents-id/c9ff6182-67ce-45ef-ac40-e3f916090599/Membercommunication.pdf
This is one of the ethical funds in my DC scheme at work - I mainly chose it for access to Microsoft (I work in IT and they should get another 30% of cloud revenue over the next few years)
Drip feed monthly investing since December has resulted in a 6.042% increase in fund value (down from 11.029% in late July.)
The top ten holdings are....
Microsoft Corp 3.9
Apple Inc 3.5
Alphabet 2.5
Johnson & Johnson 1.4
Nestle 1.2
Visa 1.2
Procter & Gamble 1.0
Royal Dutch Shell 1.0
Bank of America 1.0
AT&T 0.9

chamberino

Malthusian wrote: »

The primary responsibility of directors is to increase the company's profits, not try to persuade investors to buy their shares for non-financial reasons./QUOTE]

Good point - I suppose the stock market is secondary and not necessarily related to the strategy and success of the company.

steampowered

If "ethical" investment simply means excluding certain types of company from the portfolio (e.g. tobacco and weapons companies), there is no reason to think that the returns would be any lower than a non-ethical fund.

AnotherJoe

Malthusian wrote: »

The primary responsibility of directors is to increase the company's profits, not try to persuade investors to buy their shares for non-financial reasons

In theory. In practice directors main activity seems to be manipulating the companies financial performance in such a way that their bonuses are increased irrespective the damage that causes to long term prospects for the company.