A significant development in recent years has been the rise of so-called ethical investment funds. Every defined contribution pension plan has a small group of members who want their fund’s investments to reflect their own ethical values, even if no 2 investors are likely to totally agree on what constitutes ethical and what doesn’t.
As a recent Financial Times article says, the philosophy behind funds varies considerably. At one end of the spectrum is what the FT terms the Calvanistic approach: no arms, tobacco, alcohol, gambling or sex.
At the other end lie funds with sophisticated rating systems designed to identify companies that make a positive Environmental, Social and Governance (ESG) contribution. The rationale being that such firms possibly have a more enlightened management culture that could offer long-term performance gains.
For these firms, the impact of the company on its environment plays a significant role in determining their suitability as an ethical investment. The FT then goes on to pour cold water on the idea as the article pulls apart the typical major firms that make up such investment portfolios.
Some of the largest funds typically include the same firms – HSBC and GlaxoSmithKline, for example. Firms that the FT suggests have been accused of several unethical activities including bribery and money laundering. Others, such as Shell are involved in Arctic drilling and have been accused of causing pollution in the Niger Delta, yet they still feature as significant investments in many funds.
Interestingly, many of these ethical investment funds have performed comparatively better than the FTSE All Share Index. In part, the FT says, because they specifically exclude firms like BP involved in the energy sector and mining companies whose share values have collapsed along with commodity prices.
It raised the thought: Are there any mining or metals industry companies that would make it onto the short list of the most ethical investments? Or, maybe more to the point, what constitutes an ethical metals firm or, indeed, is there an ethical metal?
Ethical investment funds do not generally invest directly in commodities of any kind, even though there was a move for the investment community to diversify into commodities as a supposed counter-cyclical hedge against stock markets.
Some would argue mining and metal refining are such polluting activities that none of them should be included but that is neither fair nor sensible. Few would argue that hybrid cars are environmentally friendly but Toyota’s Prius wouldn’t run without nickel, the mining and refining of which is often a polluting activity.
Some firms do it better than others, though. You can’t tar all miners or refiners with the same brush and, no doubt, some firms have much higher ESG credentials than others.
Although not intended for the investment community, the Conflict Minerals Dodd-Frank Consumer Protection Act seeks to ensure certain minerals are not sourced from areas of conflict such as the eastern Congo. So does gold, tantalum or tin sourced from, say, Australia, Peru or Brazil constitute an acceptable ethical source? The price premium such suppliers achieve in the market reflects more the security of supply and dependable quality than any ethical credentials.
Check back tomorrow for part 2 of this series on the existence of ethical metals companies.