Brendan Burgess
Founder
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This is the text of an article which appeared in the February 2007 edition of Accountancy Ireland, the journal of the Institute of Chartered Accountants
Ethical Investment Options available to Irish Investors
So you want to invest ethically? What does ethical mean to you? Are you happy just to avoid investing in companies which damage the environment or which manufacture tobacco? Or would you like to invest in companies which actually do some good?
There are five ethical unit linked funds available to the Irish investor. These funds have different investment criteria. This article summarises the available funds and answers the questions most frequently asked by investors. We also look at the ethical ratings of Irish quoted companies and assess how ethical an ordinary unit linked fund investing in the Irish stockmarket would be.
Fund management charges
The annual management charges on these funds vary from .5% to 2.875%, so selecting a fund with low charges is very important. Three of the funds are up-front and clear about their charges. I could not get a clear understanding of the charges of the Friends First or Hibernian funds on their websites or in brochures. When I did get information by email, I found them complex and difficult to understand. I would be wary of investing in any such fund. In contrast, the charges on the other funds were simple and clear.
Dolmen Butler Briscoe Green Effects Fund
Most funds exclude companies which are in specified industries but the Green Effect Fund is ethically more proactive. It invests only in companies which are on the NAI - the Natural Stock Index. This is an index of around 25 shares which have very strong ethical principles. The companies on the index have to produce products which are used to boost the environment or human welfare, such as solar power or drugs for the prevention of HIV/Aids. Alternatively, they can be companies whose products are produced in a very ethical way e.g. The Body Shop or Severn Water.
Companies Involved in the following activities are excluded
• Produce or sell nuclear energy or nuclear technology
• Produce or sell arms
• Discriminate against social or ethnic minorities
• Manufacturing produce through child labour
• Production processes damaging to the environment
• Release genetically manipulated products
Charges: 2% initial charge and .75% per annum afterwards.
This product has very good information online including details of companies in which it invests and charges. It also provides regular monthly updates.
Minimum investment: €5000
Website: www.greeneffects.ie
EBS Indexed Ethical Global Equity Fund
The FTSE produces a range of indexes under the brand name FTSE4Good. These indexes are comprised of shares which meet the following criteria:
For inclusion, eligible companies must meet criteria requirements in five areas:
• Working towards environmental sustainability
• Developing positive relationships with stakeholders
• Up-holding and supporting universal human rights
• Ensuring good supply chain labour standards
• Countering bribery
Excluded Companies
• Tobacco Producers
• Companies manufacturing either whole, strategic parts, or platforms for nuclear
weapon systems
• Companies manufacturing whole weapons systems
• Owners or operators of nuclear power stations
• Companies involved in the extraction1 or processing of uranium
The EBS Indexed Ethical fund is 50% invested in the FTSE4Good Europe 50 Equities Index and 50% in the FTSE4Good Global 100 Equities Index.
There's a certain amount of overlap between the two indices so overall there are currently 111 companies, none of which is Irish. Breakdowns are currently :
Country - UK 30%, US 22%, France 13%, Switz 8%, Germany 6% and Others 21%.
Sector - Banks 25%, Pharmaceuticals 14%, Energy 13%, Telecoms 11%, Technology 11%, Other Financials 8% and Others 16%.
No initial charge. 1.5% annual management charge. Exit charges up to 5% if you leave within the first 5 years.
Bank of Ireland/New Ireland Smart Funds Ethical Equity Fund
Bank of Ireland Asset Management Limited (BIAM) who manages these funds has a dedicated Ethical Committee which includes independent ethics advisers to provide guidance in the formulation of policy that determines the selection of investments for the ethical funds. BIAM also use EIRIS research to vet stocks bought, and to act as an independent audit of stocks held and withheld from the ethical funds. EIRIS provides independent research into the social, environmental and ethical performance of companies worldwide.
Excluded companies:
The Defence Industry
Animal Testing for Cosmetics
Gambling
Contraceptives and Abortifacients
Tobacco
Pornography
Environmental Damage
Human Rights Abusers
Stem Cell Research
Investments in this fund include: AIB, Anglo Irish Bank and CRH.
Minimum investment: €5,000
Annual management fee: 1.5%
Bank of Ireland Life has a Regular Savings Option which has a minimum contribution of €100 per month. In addition to the 1.5% management fee, you also pay a monthly contribution charge of between 3% and 5%.
New Ireland has a Regular Savings Option where the minimum is €1,000 per month. The monthly contribution charges are slightly lower.
Hibernian Socially Responsible Investment Funds
Hibernian offer 5 ethical funds: a Managed Fund, a European Equity Fund; a Global Equity Fund, a High Yield Equity Fund and a Bond Fund.
The companies are selected by Hibernian’s sister company Morley Fund Management which has a team which specialises in ethical research.
These funds avoid companies which "contribute to social and environmental problems; are involved in armaments, nuclear power, gambling, tobacco and pornography; are heavy polluters in the chemical and basic industrial sectors; contribute to climatic change, e.g. the automobile industry and extractive industries such as coal and oil; produce dangerous substances that cause cancer or other health problems; are involved in the exploitation of people." They select companies which promote positive change such as “providers of sustainable energy, providers of healthcare services and waste recycling services”.
There is no prominent information on their website or in their brochure on their charges, so I would avoid this product.
Minimum investment: €5,000
Friends First Stewardship Fund
Investment criteria:
Invests in companies which display positive criteria including:
• Supplying the basic necessities of life
• Offering product choices for ethical and sustainable lifestyles, e.g. fair trade, organic.
• Improving quality of life through the responsible use of new technologies
• Good environmental management
• Actively addressing climate change, e.g. renewable energy, energy efficiency
• Promotion and protection of human rights
• Good employment practices
• Positive impact on local communities
• Good relations with customers and suppliers
• Effective anti-corruption controls
• Transparent Communication
Avoids companies involved in the following:
• Tobacco or alcohol production
• Gambling
• Pornographic or violent material
• Manufacture and sale of weapons
• Unnecessary exploitation of animals
• Nuclear power generation
• Poor environmental practices
• Human rights abuses
• Poor relations with employees, customers or suppliers.
Minimum investment: €7,000
I don’t think that Friends First would be able to invest in itself as one of its investment criteria is “transparent communication”. This is what it says about the charges on its regular savings plan. I have no idea what this means except that they seem extraordinarily high. They are certainly not transparent:
“The Stewardship Fund is also available on our regular premium “Smart Saver” plan. If investing directly through Friends First the client receives an allocation of 105% (varies according to commission basis) of the premiums for the first 3 years reducing to 98% from year 4 onwards. There is no bid/offer spread. The annual management charge is 2.875% reducing by 0.5% from year 6 onwards. Please be aware that early encashment penalties apply as follows: Up to year 4 = 5%, year 5 – 4% and year 6 = 3%. Again please be aware that charges may vary if this investment is taken out through a third party.”
First Active Stewardship Fund
This is the same as the Friends First Stewardship Fund but the charges are even higher.
Which fund is the most ethical?
This is very hard to answer. The Green Effects Fund is a positively ethical fund in that it invests in companies which do good as distinct from say the Bank of Ireland fund which avoids companies which do bad. However, one of the Green Effects investments is in a Boiron which is involved in the “Research, development and manufacturing of homeopathic pharmaceutical products.”. My own ethical principles would not allow me to invest in a company which has anything to do with homeopathy, for which there is no scientific evidence that it has or could have any effect.
And why avoid investing in companies which promote nuclear energy? Many environmentalists are coming around to the idea that it is far more environmentally friendly to generate power with nuclear energy than by extracting oil.
There is a lot of inconsistency involved in ethical investing. Some people avoid investing in alcohol companies but drink alcohol themselves. Is it unethical to invest in Paddy Power but more ethical to invest in AIB which is probably a banker to many gambling and alcohol producing companies? Some charities stopped investing in Bank of Ireland recently because they had agreed to fund an investment in a publisher of pornography. The Bank of Ireland pulled out of the deal because of the negative PR.
How ethical are Irish quoted companies?
If you look at the companies on the Irish Stock Exchange, they would nearly all appear to meet the ethical criteria of FTSE4Good or EIRIS. We don’t have companies involved in pornography, nuclear power, alcohol, tobacco or contraceptives. The only company which is in a prohibited sector would be Paddy Power which accounts for less than 1% of the index value.
Take CRH as an example. It is one of largest companies and it’s involved in an industry which has a huge impact on the environment. As a shareholder in the company, I have raised concerns about their practices at AGMs. CRH produces a detailed Community and Social Responsibility Report which outlines its approach to environmental issues and lists the various ratings it receives. Despite my concerns, it is on the FTSE4Good index and is also included in the Dow Jones Sustainability Indexes which describes CRH as
“CRH continues to rank among the sector leaders in overall CSR performance, and although there is still room for improvement, CRH makes good progress in meeting numerous sustainability challenges.”
Some people might avoid investing in Aer Lingus or Ryanair because of the contribution of airline travel to global warming. But to be consistent, the same investors would have to avoid travelling by air. Michael O’Leary of Ryanair, defended the airline recently by pointing out that because the newness of its fleet of airlines, they are the most fuel efficient in Europe. He also claimed that because of their flights are full, the harmful emissions per person per mile is the lowest of all airlines.
So if you buy a fund which invests in Irish shares or if you just buy a selection of Irish shares, you would have a fairly ethical portfolio. For example, if buy the ISEQ Exchange Traded Fund, you would pay an annual management charge of only .5% which is a lot cheaper than many of the other options.
How do you buy an ethical fund?
For most investment products, you should get a quotation from an execution only investment broker such as www.ferga.com or www.myadviser.ie. They will often be able to set up the investment with lower charges than the standard products, resulting in more of your money being actually invested and less being deducted in charges. They do this by arranging to receive less commission from the product provider than the standard product normally pays. This applies to all the products mentioned above except for the EBS.
You probably should also get a quote from Friends First directly, as they may have special rates for people who apply directly.
Which of these funds has the best investment performance?
Past performance is absolutely no indicator of future performance, so this historical information is irrelevant. However, if the performance is equal, the difference will be in the annual management charges which, as we have pointed out, vary from .5% to 2.875%.
Will the performance be reduced if you invest ethically?
There is no evidence that the returns from ethical funds are any different from the returns on general investment products. You are unlikely to suffer a loss in returns by investing in ethical funds.
There is some evidence that investing in vice funds i.e. funds which invest in tobacco, pornography and weapons outperform the market.
Are these funds adequately diversified?
Yes I think that they are. The most concentrated of these funds is the Green Effects Fund which invests in 25 companies. You can see the list of them on the website and they are fairly diverse in their interests.
Can you buy shares directly in ethical companies?
As we have seen most Irish shares are included in the acceptable range of ethical investments. So you could buy a portfolio of Irish shares directly.
I have been unable to find any reliable website which makes ethical information on publicly quoted companies available for free to the retail investor.
The favourable tax treatment of ETFs and unit-linked funds, probably makes it unwise for most people to buy shares directly.
Brendan Burgess FCA is the founder of www.askaboutmoney.com the Irish consumer finance website. He is also an active environmentalist and is a previous Chairman of the Irish Wildlife Trust.
Ethical Investment Options available to Irish Investors
So you want to invest ethically? What does ethical mean to you? Are you happy just to avoid investing in companies which damage the environment or which manufacture tobacco? Or would you like to invest in companies which actually do some good?
There are five ethical unit linked funds available to the Irish investor. These funds have different investment criteria. This article summarises the available funds and answers the questions most frequently asked by investors. We also look at the ethical ratings of Irish quoted companies and assess how ethical an ordinary unit linked fund investing in the Irish stockmarket would be.
Fund management charges
The annual management charges on these funds vary from .5% to 2.875%, so selecting a fund with low charges is very important. Three of the funds are up-front and clear about their charges. I could not get a clear understanding of the charges of the Friends First or Hibernian funds on their websites or in brochures. When I did get information by email, I found them complex and difficult to understand. I would be wary of investing in any such fund. In contrast, the charges on the other funds were simple and clear.
Dolmen Butler Briscoe Green Effects Fund
Most funds exclude companies which are in specified industries but the Green Effect Fund is ethically more proactive. It invests only in companies which are on the NAI - the Natural Stock Index. This is an index of around 25 shares which have very strong ethical principles. The companies on the index have to produce products which are used to boost the environment or human welfare, such as solar power or drugs for the prevention of HIV/Aids. Alternatively, they can be companies whose products are produced in a very ethical way e.g. The Body Shop or Severn Water.
Companies Involved in the following activities are excluded
• Produce or sell nuclear energy or nuclear technology
• Produce or sell arms
• Discriminate against social or ethnic minorities
• Manufacturing produce through child labour
• Production processes damaging to the environment
• Release genetically manipulated products
Charges: 2% initial charge and .75% per annum afterwards.
This product has very good information online including details of companies in which it invests and charges. It also provides regular monthly updates.
Minimum investment: €5000
Website: www.greeneffects.ie
EBS Indexed Ethical Global Equity Fund
The FTSE produces a range of indexes under the brand name FTSE4Good. These indexes are comprised of shares which meet the following criteria:
For inclusion, eligible companies must meet criteria requirements in five areas:
• Working towards environmental sustainability
• Developing positive relationships with stakeholders
• Up-holding and supporting universal human rights
• Ensuring good supply chain labour standards
• Countering bribery
Excluded Companies
• Tobacco Producers
• Companies manufacturing either whole, strategic parts, or platforms for nuclear
weapon systems
• Companies manufacturing whole weapons systems
• Owners or operators of nuclear power stations
• Companies involved in the extraction1 or processing of uranium
The EBS Indexed Ethical fund is 50% invested in the FTSE4Good Europe 50 Equities Index and 50% in the FTSE4Good Global 100 Equities Index.
There's a certain amount of overlap between the two indices so overall there are currently 111 companies, none of which is Irish. Breakdowns are currently :
Country - UK 30%, US 22%, France 13%, Switz 8%, Germany 6% and Others 21%.
Sector - Banks 25%, Pharmaceuticals 14%, Energy 13%, Telecoms 11%, Technology 11%, Other Financials 8% and Others 16%.
No initial charge. 1.5% annual management charge. Exit charges up to 5% if you leave within the first 5 years.
Bank of Ireland/New Ireland Smart Funds Ethical Equity Fund
Bank of Ireland Asset Management Limited (BIAM) who manages these funds has a dedicated Ethical Committee which includes independent ethics advisers to provide guidance in the formulation of policy that determines the selection of investments for the ethical funds. BIAM also use EIRIS research to vet stocks bought, and to act as an independent audit of stocks held and withheld from the ethical funds. EIRIS provides independent research into the social, environmental and ethical performance of companies worldwide.
Excluded companies:
The Defence Industry
Animal Testing for Cosmetics
Gambling
Contraceptives and Abortifacients
Tobacco
Pornography
Environmental Damage
Human Rights Abusers
Stem Cell Research
Investments in this fund include: AIB, Anglo Irish Bank and CRH.
Minimum investment: €5,000
Annual management fee: 1.5%
Bank of Ireland Life has a Regular Savings Option which has a minimum contribution of €100 per month. In addition to the 1.5% management fee, you also pay a monthly contribution charge of between 3% and 5%.
New Ireland has a Regular Savings Option where the minimum is €1,000 per month. The monthly contribution charges are slightly lower.
Hibernian Socially Responsible Investment Funds
Hibernian offer 5 ethical funds: a Managed Fund, a European Equity Fund; a Global Equity Fund, a High Yield Equity Fund and a Bond Fund.
The companies are selected by Hibernian’s sister company Morley Fund Management which has a team which specialises in ethical research.
These funds avoid companies which "contribute to social and environmental problems; are involved in armaments, nuclear power, gambling, tobacco and pornography; are heavy polluters in the chemical and basic industrial sectors; contribute to climatic change, e.g. the automobile industry and extractive industries such as coal and oil; produce dangerous substances that cause cancer or other health problems; are involved in the exploitation of people." They select companies which promote positive change such as “providers of sustainable energy, providers of healthcare services and waste recycling services”.
There is no prominent information on their website or in their brochure on their charges, so I would avoid this product.
Minimum investment: €5,000
Friends First Stewardship Fund
Investment criteria:
Invests in companies which display positive criteria including:
• Supplying the basic necessities of life
• Offering product choices for ethical and sustainable lifestyles, e.g. fair trade, organic.
• Improving quality of life through the responsible use of new technologies
• Good environmental management
• Actively addressing climate change, e.g. renewable energy, energy efficiency
• Promotion and protection of human rights
• Good employment practices
• Positive impact on local communities
• Good relations with customers and suppliers
• Effective anti-corruption controls
• Transparent Communication
Avoids companies involved in the following:
• Tobacco or alcohol production
• Gambling
• Pornographic or violent material
• Manufacture and sale of weapons
• Unnecessary exploitation of animals
• Nuclear power generation
• Poor environmental practices
• Human rights abuses
• Poor relations with employees, customers or suppliers.
Minimum investment: €7,000
I don’t think that Friends First would be able to invest in itself as one of its investment criteria is “transparent communication”. This is what it says about the charges on its regular savings plan. I have no idea what this means except that they seem extraordinarily high. They are certainly not transparent:
“The Stewardship Fund is also available on our regular premium “Smart Saver” plan. If investing directly through Friends First the client receives an allocation of 105% (varies according to commission basis) of the premiums for the first 3 years reducing to 98% from year 4 onwards. There is no bid/offer spread. The annual management charge is 2.875% reducing by 0.5% from year 6 onwards. Please be aware that early encashment penalties apply as follows: Up to year 4 = 5%, year 5 – 4% and year 6 = 3%. Again please be aware that charges may vary if this investment is taken out through a third party.”
First Active Stewardship Fund
This is the same as the Friends First Stewardship Fund but the charges are even higher.
Which fund is the most ethical?
This is very hard to answer. The Green Effects Fund is a positively ethical fund in that it invests in companies which do good as distinct from say the Bank of Ireland fund which avoids companies which do bad. However, one of the Green Effects investments is in a Boiron which is involved in the “Research, development and manufacturing of homeopathic pharmaceutical products.”. My own ethical principles would not allow me to invest in a company which has anything to do with homeopathy, for which there is no scientific evidence that it has or could have any effect.
And why avoid investing in companies which promote nuclear energy? Many environmentalists are coming around to the idea that it is far more environmentally friendly to generate power with nuclear energy than by extracting oil.
There is a lot of inconsistency involved in ethical investing. Some people avoid investing in alcohol companies but drink alcohol themselves. Is it unethical to invest in Paddy Power but more ethical to invest in AIB which is probably a banker to many gambling and alcohol producing companies? Some charities stopped investing in Bank of Ireland recently because they had agreed to fund an investment in a publisher of pornography. The Bank of Ireland pulled out of the deal because of the negative PR.
How ethical are Irish quoted companies?
If you look at the companies on the Irish Stock Exchange, they would nearly all appear to meet the ethical criteria of FTSE4Good or EIRIS. We don’t have companies involved in pornography, nuclear power, alcohol, tobacco or contraceptives. The only company which is in a prohibited sector would be Paddy Power which accounts for less than 1% of the index value.
Take CRH as an example. It is one of largest companies and it’s involved in an industry which has a huge impact on the environment. As a shareholder in the company, I have raised concerns about their practices at AGMs. CRH produces a detailed Community and Social Responsibility Report which outlines its approach to environmental issues and lists the various ratings it receives. Despite my concerns, it is on the FTSE4Good index and is also included in the Dow Jones Sustainability Indexes which describes CRH as
“CRH continues to rank among the sector leaders in overall CSR performance, and although there is still room for improvement, CRH makes good progress in meeting numerous sustainability challenges.”
Some people might avoid investing in Aer Lingus or Ryanair because of the contribution of airline travel to global warming. But to be consistent, the same investors would have to avoid travelling by air. Michael O’Leary of Ryanair, defended the airline recently by pointing out that because the newness of its fleet of airlines, they are the most fuel efficient in Europe. He also claimed that because of their flights are full, the harmful emissions per person per mile is the lowest of all airlines.
So if you buy a fund which invests in Irish shares or if you just buy a selection of Irish shares, you would have a fairly ethical portfolio. For example, if buy the ISEQ Exchange Traded Fund, you would pay an annual management charge of only .5% which is a lot cheaper than many of the other options.
How do you buy an ethical fund?
For most investment products, you should get a quotation from an execution only investment broker such as www.ferga.com or www.myadviser.ie. They will often be able to set up the investment with lower charges than the standard products, resulting in more of your money being actually invested and less being deducted in charges. They do this by arranging to receive less commission from the product provider than the standard product normally pays. This applies to all the products mentioned above except for the EBS.
You probably should also get a quote from Friends First directly, as they may have special rates for people who apply directly.
Which of these funds has the best investment performance?
Past performance is absolutely no indicator of future performance, so this historical information is irrelevant. However, if the performance is equal, the difference will be in the annual management charges which, as we have pointed out, vary from .5% to 2.875%.
Will the performance be reduced if you invest ethically?
There is no evidence that the returns from ethical funds are any different from the returns on general investment products. You are unlikely to suffer a loss in returns by investing in ethical funds.
There is some evidence that investing in vice funds i.e. funds which invest in tobacco, pornography and weapons outperform the market.
Are these funds adequately diversified?
Yes I think that they are. The most concentrated of these funds is the Green Effects Fund which invests in 25 companies. You can see the list of them on the website and they are fairly diverse in their interests.
Can you buy shares directly in ethical companies?
As we have seen most Irish shares are included in the acceptable range of ethical investments. So you could buy a portfolio of Irish shares directly.
I have been unable to find any reliable website which makes ethical information on publicly quoted companies available for free to the retail investor.
The favourable tax treatment of ETFs and unit-linked funds, probably makes it unwise for most people to buy shares directly.
Brendan Burgess FCA is the founder of www.askaboutmoney.com the Irish consumer finance website. He is also an active environmentalist and is a previous Chairman of the Irish Wildlife Trust.
