A new ETF from Inspire in the US is trying to show that bigotry knows no bounds (hat tip to the FT):
The methodology removes from the investment universe the securities of any company that has any degree of participation in activities that do not align with biblical values, which are:
- the LGBT lifestyle; and
- rights violations such as association with or doing business in terrorist sponsoring countries, countries having oppressive systems of government, and countries where there are known human rights violations related to the persecution or severe discrimination against Christians, and poor labor practices.
Jokes aside, there are no easy answers when it comes to ethical investing. Any ethical screens involve “reducing the opportunity set”. For example, there are 1,600 stocks in the MSCI world index. If you reduce that universe to 800 stocks through ethical screens and then ask a fund manager to outperform, you are asking him/her to beat the market with one arm tied behind their back.
So, what you really want is to reduce the investment universe enough to cater to your ethical concerns but no further – if you don’t mind investing in companies with a gay CEO (i.e. Apple), then you don’t want to invest in an ethical fund that can never buy Apple.
There are three main approaches:
- Positive ethical investing: This involves finding companies that are actively contributing to causes that you feel strongly about. It might mean investing in a solar manufacturer, a biotech with a potential cure for cancer or an electric car manufacturer.
- Negative screening: This involves excluding companies that do not meet ethical standards. It may mean not investing in any companies that are involved in tobacco, that produce carbon or that make weapons.
- Best of breed: This involves ranking companies on a range of metrics and excluding those that don’t meet particular standards. For example, a carbon/global warming strategy may exclude companies involved in brown coal or tar sands (generally considered the most polluting) but include companies that produce natural gas as it pollutes less.
Positive investing is difficult – finding stocks that are good quality and cheap is hard enough, let alone also needing to find one that’s going to help a cause that you feel strongly about. If you find a positive ethical stock that is only average quality and the stock is very expensive should you buy it anyway, expecting a poor return?
My take is that if you really like what a company is doing and you want to make an impact, then don’t invest – make a donation. I’m sure the company will find your donation more useful than you buying its shares from another investor and pushing the share price up slightly. And as an added benefit, if the stock is particularly expensive (they usually are – because investors are buying with their heart rather than their head), a donation lets you take your tax deduction up front rather than waiting for a few years for the share price to fall…
Negative screening needs to be customised, which makes investing in a broad ethical fund difficult. Taking the above Inspire ETF as an example, a progressive Christian may want to avoid tobacco and gambling but feels that the anti-gay angle is a bit much, and so would have to find another fund.
A different Christian investor may not want to invest in contraceptives but feels that tobacco is an individual’s choice. A non-religious investor may have the opposite view.
So, the problem with most of the existing products out there is that they involve you shopping around to try and find a provider whose beliefs line up with your beliefs.
Best of Breed
Best of breed can be similarly problematic. If you don’t want exposure to fossil fuels, then holding a gas producer with the view that it is “the least damaging, and it is cheap and so I think I can profit from it” can seem hypocritical.
The MB Fund Way
The MB fund will use negative screens. To get around the customisation issue, we use Separately Managed Accounts and Individually Managed Accounts that are customised to your ethics if you so choose. Basically:
- we choose a large portfolio of stocks based on them being good quality and cheap.
- you choose from a pre-set list to exclude stocks from your portfolio. Some of our screens include: Nuclear, Carbon, Animal Testing, Contraceptives, Tobacco, Alcohol and Weapons.
Damien Klassen is Chief Investment Officer at the MB Fund launching in April 2017. Register your interest now (if you haven’t already):