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Which comes first, ethics or business?

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Evermore, investors are becoming conscious of how their money is invested; that is, whether it is invested in ethically positive ways whilst it turns them a profit.

Such an investor may initially approach a ‘regular’ financial adviser to help them, perhaps following the recommendation of a friend or family member.  They tell the adviser that they wish to invest ethically, who in return thrusts at them one or two of the more well known ethical funds alongside a ‘this should do you’ type of comment.

Although investing via any ethically screen source has to be viewed positively, it is worth ‘lifting the lid’ and looking at what actually constitutes an ‘ethical investment’ in the eyes of a particular provider, as well as considering whether or not this allies with the views of the individual making the investment. 

To do this properly, a specialist ethical financial adviser should firstly sit and canvass, discuss and record a client’s opinions in some depth, and secondly, put the required effort in behind the scenes to make sure that any recommendation genuinely has both financial and ethical credibility.

Any potential investment warrants careful consideration and should be subject to extensive ethical/environmental analysis as well as financial analysis, some of which is conducted internally within the advisory firm, and some of which is available to be purchased from external experts.

Let me give you a couple of examples of potential investments that have attracted suitable analysis by ethical advisers and fund managers. 

For a number of years Germany has been one of the European leaders in promoting renewable energy which has become very popular with German householders - many of whom now adorn their houses with solar panels.

This resulted in exceptional growth for the German solar manufacturing industry.  However, China has upped its own production considerably, supported by both Government subsidies and cheaper labour and manufacturing costs than Germany can afford.  Accordingly, the availability of cheaper Chinese imports has had a devastating effect on equivalent German businesses that have been unable to compete, with allegations of dumping being made and a trade spat blowing up between Europe and China.  The situation is obviously unsustainable and has resulted in the demise of many of the firms - both German and Chinese - and very poor returns for investors. So despite the pleasing continued rapid growth in solar energy generation, it has largely been a troubled sector to invest in for some years now.

Given these continuing pressures, any adviser with their eye on the ethical ball will have focused on investing clients’ assets in other areas which have equal environmental credence, but with much stronger financial prospects.  Careful consideration of the financial and economic factors will have helped fund managers keep abreast of this issue and take an objective, measured decision that goes beyond merely supporting the environmental credentials of the underlying businesses.

A second example relates to a particular US-based international conglomerate which has subsidiary businesses that stretch across a vast array of diverse manufacturing areas.  One of the areas it works in is as a world-leader in the research, development and production of environmentally positive products, including electric cars, low energy light bulbs, energy efficient engines and a myriad of other low-energy products.  These are the types of ground-breaking initiatives that the majority of ethically minded investors support and in isolation is the type of company many would like to invest in and promote.

On the other hand, however, this particular company also still retains a long-standing division that produces engines for the US military, to be used in either aircraft or ships.  Although not the biggest part of its business it is still substantial in size, a core part of the company’s strategy and will remain so in the future.  Many ethical investors are passionate about supporting environmentally friendly initiatives, but of equal concern, it is very common for them hold strong anti-war views and more often than not, when contemplating ethical issues they generally have a desire not to be invested in weapons. 

This leaves a dilemma.  Obviously investment in an arms producer is not akin to ethical investing for most, but in this instance would it be justifiable because it would also be supporting the fantastic environmentally-friendly initiatives that they are pursuing?  On balance, probably not, but without ‘lifting to lid’ of this type of investment and considering it carefully, would any ethical investment process that clients are paying to rely on be seen as viable and credible?

Taking such a measured, considered approach to investing is key to the success of long term ethical investing and when seeking financial advice which is both ethically and financially savvy, look for evidence that issues such as these are researched and consider, unless you are happy to be invested in something fairly mainstream which may only achieve a watered down version of your ethical ambitions, where the lid is left shut and the tricky questions are not asked.

Author: Ali Raza

This article was written on behalf of Gaeia. Gaeia is a trading name of Castlefield Gaeia Limited (CGL) and the property of Castlefield Capital Limited. CGL is authorised and regulated by the Financial Conduct Authority. Registered in England & Wales No. 04605261. Part of the Castlefield employee-owned group. Member of the Employee Ownership Association.

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