Ethical is back.
After decades spent morphing through terms such as sustainable or responsible or environmental, social and governance (ESG), the original ‘ethical investing’ label has returned to vogue.
In NZ, for example, the Pathfinder-run KiwiSaver scheme, CareSaver, launched this month under the ethical banner rather than the more modern descriptors.
And last week AMP Capital joined the retro trend after it rechristened its Responsible Leaders fund series as Ethical Leaders – a name change that portfolio manager, Kristen Le Mesurier, said would resonate better with investors.
“As an industry we get excited about things like ESG integration but average investors don’t necessarily understand it,” Le Mesurier said. “But ordinary people absolutely understand what ethical investing means.”
Although ‘ethical’ remains a highly-loaded and subjective term, she said for AMP Capital it represented a “line in the sand” that clearly shows what sectors the funds avoid.
Rebekah Swan, AMP Capital NZ ESG investment specialist (a title she took on this March), said the funds were “increasingly focused on ethical investment considerations”.
“What’s most important is that ethical and ESG funds remain true to label, and we firmly believe this is achieved through transparency of three critical components – the investment approach, the return objective, and the disclosure of each holding in the fund,” Swan said. “This allows investors to understand what they are invested in and where the fund sits on the ESG, ethical and impact investing spectrum.”
To date, the AMP Capital Ethical Leaders funds have cut out a number of sectors such as controversial weapons, tobacco and fossil fuels.
In April this year the manager also narrowed down the number of energy stocks in the portfolio after redefining income cut-off parameters.
“The tightening of our fossil fuel screen from 20% to 10% revenue threshold, means the Ethical Leaders funds will be invested in fewer mining and energy companies globally,” Swan said. “We continue to exclude all companies that make a material amount of money from the most carbon-intensive fossil fuels.”
Le Mesurier said the AMP Capital ethical investment committee was also mulling over further negative screens over factors including animal welfare, nuclear energy and manufacture of civilian firearms.
But she said while most investors shared some common ethical investment sentiments – cluster bombs and tobacco, for example, are easy sells – as the potential exclusion list expands, consensus might prove more difficult.
“With issues like animal welfare, for example, there are many different perspectives among our investors,” Le Mesurier said.
She said AMP Capital regularly meets with the funds’ large investors (mostly big superannuation funds in Australia) to gauge the latest ethical concerns.
All stock-screening ideas filter through AMP Capital’s ethical committee (which meets three times a year) as well as the broader investment team. This year the group is also adding a new input with a trans-Tasman Youth Advisory Committee that will feed into the decision-making process.
The youth group will include about 10 members, mostly sourced from universities. Le Mesurier said contenders for the committee would likely have some interest in ethical investing already.
Whether the next-generation ethical concerns will take the negative screening to the next level remains to be seen.
“We haven’t yet had an issue that we were not able to implement from an investment perspective,” she said.
However, Le Mesurier said cutting sectors in the name of ethics could ultimately destablise the risk-return relationship.
“I could see a time when the sheer number of exclusions means it’s not possible to still deliver benchmark-comparable returns,” she said.
At current exclusion levels, though, Le Mesurier said the AMP Capital ethical funds should still be able to deliver comparable returns over the long term without taking on excessive sector risk.
“But I think you need active management to maintain comparable returns,” she said. “It’s a lot harder for passive managers.”
If index funds carve out more sectors to compete in the ethical space they inevitably veer off the broader benchmark – introducing volatility – without the risk-rebalancing tools available to active managers, Le Mesurier said.
She said ethical funds need to be judged on traditional investment metrics – risk and returns after fees – not just on the scale of their exclusions.