Wednesday 16th April 2014                 Change text size:

A seriously ethical approach to investment



Cindy Rose

Cindy Rose, head of SRI research at Aberdeen Asset Management, spoke with Alex Blackburne about its Ethical World Fund, which highlights that investing ethically can diminish the risks involved with conventional investments.

[The fund’s] objective is to incorporate ethical considerations into investment decisions”, explains Cindy Rose, head of SRI research at Aberdeen Asset Management.

It has 15 screening criteria that start with alcohol and go down to weapons, if you list them alphabetically.

Seven of the screens are done as a percentage of sales […] The other eight screens have to do with the history of the company.”

Using negative screening, Aberdeen examines companies over a three-year rolling period to assess if it contravenes the stated criteria.

Alcohol is the first of the 15 screens that the Ethical World Fund implements. Aberdeen places a turnover limit of 10% of sales on it, so any companies generating a higher proportion of their revenue from this sector would be disregarded.

Animal testing is another screen, and this time Aberdeen are even stricter, allowing no animal testing whatsoever. This means that pharmaceutical companies, which must conduct or outsource it, won’t appear amongst the stocks.

The same goes for petrochemical companies, some of which have to conduct animal testing by law to ensure their product isn’t dangerous when humans come into contact with it.

The next three negative screens are business practices, community and corporate governance.

The environment criterion is also conducted using negative screening. Patterns of legal breaches or fines for environmental hazards over the rolling three-year period mean exclusion in the fund’s portfolio.
Gambling, human rights, labour, military and nuclear energy are next, followed by pornography.

Our threshold turnover limit for sales for pornography is 5%”, says Rose.

Some people will [have] zero tolerance on a fund for these different things, within negative screening.

We found that if you do this, for example for pornography, you wipe out entire sectors like grocery store chains, petrochemical companies that sell soft porn in their stations, telecommunications companies with mobile communications, and hotels, so we permit a small amount of sales from pornography, so that the clients’ investible universe is not too limited.”

Product quality, tobacco and weapons are the final three exclusions.

It’s a fairly hefty and intricate list of activities and screens, and Rose stresses that the Ethical World Fund is for a particular type of investor.

It really suits the type of investor who wants to avoid certain activities in the market”, she says.

There are lots of different types of investors. Some are interested in having a voice in companies that aren’t traditionally held in negatively screened SRI funds, and they want to be able to encourage a company to do better.

This is not that type of fund. This fund is for people who have a very black and white view on things, and might not want animal testing or nuclear activities, or companies that have poor ESG records.

It’s a fairly heavily screened fund, performance is fairly strong, and the investment process works.

It’s based on due diligence and a lot of homework, and in fact the average time we hold companies for is over five years now, so it is very much a buy and hold approach.”

Last week, Blue & Green Tomorrow wrote about a group of investors that managed $3 trillion of assets had called for improved reporting of environmental, social and corporate governance (ESG) activities.

Aberdeen has an ESG engagement policy for all its equities, not just its SRI funds, and is also a signatory to the UN Principles for Responsible Investment (UNPRI).

Rose describes how this helps them understand the sustainable investment world better.

It really does commit us to understanding the underlying ESG issues for all of our holdings, and that gives the managers a better 360 degree view of a company”, she says.

It tells you a bit more about the risks that they might not pick up, and just basic financial assessment.

It gives us better relationship management qualities with the companies that we invest in, simply because we are always going to see them, and we can ask about things that might not come up in normal financial conversations.

It’s a good way of keeping track and also follows the guidelines of the stewardship codes because we can report on a company’s activities to our clients.”

Concluding, Rose adds that ethical investment – specifically, the nature of the Ethical World Fund’s carefully-selected, negatively screened portfolio – dilutes the potential hazards of conventional investing.

In its broadest sense, I think ethical investment highlights risks that could be there, that if you weren’t looking at ESG issues, you might miss”, she says.

We really think that the market is coming around to the fact that these things are all integrated.

It’s a myriad of things that go together that make up the balance sheet, and it would take some forensic accounting to pull them all apart, but at the end of the day, they do have an impact.”

For more information about Aberdeen Asset Management’s Ethical World Fund, visit its website.

Alternatively, if you want to find out more about sustainable investment more generally, ask your IFA or fill in our online form.

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