Robo-investors are Funding Damaging Social and Environmental Activities

The UK’s largest tracker funds have invested £1.7 billion into tobacco and fossil fuel companies

Tracker funds are financing activities that are damaging people and the planet and pumping hundreds of millions of pounds into tobacco and fossil fuel companies, responsible investment experts Castlefield Advisory Partners warn in a report launched today.

The rise of the tracker investor and consequences for society and the environment, released ahead of Good Money Week (30th October – 4th November 2016), reveals that six of the UK’s biggest tracker funds have £504 million invested in the tobacco industry, or 4.4% of their combined value, and eight of the biggest funds have £1.2 billion invested in fossil fuels, or 9% of their combined value.

Since 2007 “tracker” or “passive” funds have grown four times faster than actively managed funds, investing $6 trillion worldwide. They are particularly popular with younger investors, making up over 90% of the equity portfolio of those aged 18-35. Trackers offer low-cost investment without any active decision making or fund management and are the default investment option for many pension schemes. In most cases they simply invest in all companies in an index such as the FTSE All Share, using automated trading.

John Ditchfield, Partner at Castlefield, said: “Trackers might appear to be a cheap investment solution, but we are concerned that people may not be fully aware that they are financing damaging social and environmental activities and putting investors’ money at risk.”

“Automated robo-investors are pumping hundreds of millions in pension savings and other investments into businesses which individuals would not choose to support and may actively want to avoid, for example tobacco and heavily polluting fossil fuel companies.”

“More than 70 countries have ratified the Paris Climate Agreement and it is about to come into force, but a large chunk of tracker capital is invested in coal, oil and gas, exposing investors to serious risk.”

Investors have strong views about how their money should be used, reveals a new survey for Triodos Bank, released alongside the Castlefield report:

– 60% believe people should avoid investments that negatively affect people, society and the environment
– 47% would move their money if they found their investments conflicted with their values
– Nearly half (48%) think that it should be standard for banks and other financial advisors to make customers fully aware where their money is invested – but 47% have no idea which companies and industries their money is supporting.

Responsible investment is prudent financial planning

Avoiding investment in activities that harm society and the environment is not just a moral issue but also prudent financial planning. The Paris Climate Agreement becomes law in November and countries around the world are taking action to keep global warming below two degrees.

Mark Carney, Governor of the Bank of England, has warned that action to limit climate change could turn huge reserves of oil, coal and gas into un-burnable “stranded assets” leaving investors with huge losses.

Flaws in the tracker approach were exposed in the dot.com boom and subsequent crash when funds automatically bought company shares at the point where they entered an index irrespective of the company’s business model or level of profitability.

A research report from Alliance Bernstein, The Silent Road to Serfdom, argues that passive investing is worse for society than Marxism. It notes that both active investment management in capitalist economies and centrally planned Marxist economies seek to allocate capital to productive purposes, but trackers abdicate that responsibility and simply invest in the largest businesses.

Castlefield’s report acknowledges that low costs and charges have helped to fuel the huge growth of investment trackers but it argues that the returns on managed socially responsible investment funds have outperformed some of the biggest UK tracker funds over the last five years.

Alliance Trust (Sustainable Future UK) and WHEB Sustainability funds have both beaten the multibillion Vanguard FTSE UK All Share, L&G European Trust and HSBC FTSE All Share tracker funds over the last three and five years.

John Ditchfield said: “When making investments it is more important to look to the future than the past. These socially responsible funds have long-term sustainable investment strategies, and are well placed to spot opportunities in the emerging green economy. As the world’s population grows beyond seven billion, market innovation in areas such as clean energy, water infrastructure and energy efficiency will become more and more important.”

“Responsible investment funds are delivering very positive returns, and we want to encourage investors to move away from potentially harmful tracker funds and choose to be ‘active’ and smart investors, investing in a more sustainable world.”

Simon Holman, Partner at Castlefield Investment Partners, said:

“This is a key issue to put under the spotlight. We know that Millennials are the group most keen on investing in companies with positive environmental and social outcomes, but are also one of the groups with the fewest available assets to invest for their future. Investing in such damaging industries isn’t what many of the younger generation want to do with their precious funds and the finance industries need to offer better solutions. These funds might be ‘low cost’ to buy but they are already high cost in terms of their environmental and social impacts, let alone the possible future financial costs from being invested in the areas highlighted here.”

Consumer Survey Results – from Good Money Week Survey from Triodos Bank

Opinium Research interviewed 4228 people about responsible investing for Triodos Bank:

Nearly half of investors don’t know where their money is invested but want to be told

• 48% think that it should be standard that banks and other financial providers should make customers clearly and fully aware where their money is being invested.
• 47% of people do not know about which companies or industries are supported in their investments; 11% have no idea how to find out.

Three in five say people should avoid damaging investments; nearly half would move their money

• 60% think people should avoid investments that negatively impact people, society and the environment.
• 47% said that they would move their money if they discovered their money was being invested in companies that conflicted with their personal values and ethics.
• The areas investors most want to avoid are: 1. Human trafficking, 67%; 2. Forced/child labour, 65%; 3. Animal testing and factory farming, 47%; 4. Arms/munitions, 46%; 5. Companies involved in tax avoidance, 45%; 6. Tobacco, 38%; 7. Companies with accounting or remuneration controversies, 37%; 8. Fracking, 26%; 9. GM foods, 20%; 10. Nuclear power, 17%; 11. Coal, oil and gas, 13%.

Three in five people would like to invest in companies which make money and a positive impact

• 58% think people should invest their money where it can support companies that make a positive contribution to society, to people and the environment.
• Nearly half – 47% believe that companies trying to make a positive contribution to society and the environment are more likely to succeed in the long term.
• 62% would like their money to support companies which are profitable and make a positive contribution to society and the environment.
• The areas investors would most like to invest in for positive impact are: 1. Healthcare, 49%; 2. Energy efficiency, 49%; 3. Renewable energy, 38%; 4. Urban regeneration and social housing, 31%; 5. Sustainable business, 31%; 6. Organic farming, 26%.