Exclusions prohibit certain investments from a fund or portfolio. For us these are client-driven at the portfolio level, and at a fund level these are set within the fund’s objectives. Ethical or values-based investing is often associated with exclusions, an approach that incorporates an investor’s moral principles,
values or religious beliefs by screening out investments with particular features. These may be applied on a variety of issues.
If we think about the difference between ethical and ESG integration ethical investing is a values-driven approach to investing, focused on excluding assets that do not match the personal values of the investor,
effectively looking at the impact the assets have on the world around them.
ESG integration, on the other hand, considers the impact that an investee company’s environmental, social and governance practices might have on the future financial prospects of the investee company, how the company is managing those factors and how they are priced into the investment.
Charities have legal guidelines they should consider when formulating an ethical policy and we have produced a guide to help with this process.
- There is no such thing as an ethical portfolio that will suit every ethical investor
- Portfolios or unitised funds will be constructed to reflect a specific set of ethical concerns
Traditional Sin Sectors
There are 5 traditional ‘sin’ sectors: tobacco, arms, gambling, alcohol and pornography.
These are the five sectors which tend to receive the most attention when ethical policies are being
discussed. However these areas may not align with every client’s objects and concerns.
Ethics are very personal and therefore we do not have a one size fits all approach; instead we work
with you to determine the right policy to meet your criteria.
There is no such thing as an ethical portfolio that will suit every ethical investor Portfolios or unitised funds will be constructed to reflect a specific set of ethical concerns. We use an external screening system to implement ethical policies for clients.
The system covers the following areas:
Ethical issues & social impacts
- Human rights –
- Supply chains
- Sanctity of Life
impacts & climate
- Fossil fuels
- Animal testing
- Animals for
- Animals nonfood
- Palm oil
UNDERSTANDING THE CONTEXT AND IMPLICATIONS
Your investment manager will discuss your ethical concerns with you and will help formulate the
ethical policy that meets your requirements. We have two ways in which we approach this:
1. An ethical restrictions supplement which covers the most common ethical concerns
2. A more detailed questionnaire for more complex concerns, which helps to map the
appropriate policy for you
We mentioned the classics in investing stocks of tobacco, alcohol, armaments, gambling and pornography
previously. However even with these, there are different ways to screen these activities.
- Production versus retail – if you decide to exclude tobacco and alcohol from your portfolio,
we would usually recommend that you exclude the producers rather than the retailers of these
products. The rationale is that if we incorporated companies that sold these products we would
capture a plethora of companies across a number of different sectors; for example: oil companies
would be excluded as they operate petrol stations which sell tobacco and alcohol products, as well
as of course, supermarkets. On this basis we would instead look to include companies, such as
pubs, which derive a significant proportion of their revenue from the sale of alcohol – see materiality
- Retail of guns – calibrating the armaments’ policy is important, for example some well-known
retailers in the US, sell guns. The intention of the armaments’ exclusion may well be aimed more at
military use so it is important to set the appropriate level of screening.
- Pornography – there are very few companies that are picked up in a screen of producers of
pornography; however mobile providers may be captured in a distribution screen.
It is important to evaluate the materiality of the exposure a company might have to an excluded
activity. As part of the screening process we are able to quantify this.
As shown in the above example of production versus retail, understanding the extent of the exposure a company might have to an activity is an important part of the process