Axa move prompts call for ethical investing clarity

Axa move prompts call for ethical investing clarity

Asset allocators have called for greater clarity for investors around the impact ethical or sustainable investing has on risk and returns.

Last week insurer Axa revealed it was to divest around €1.8bn (£1.4bn) of tobacco industry assets in its capacity as “a responsible health insurer and investor”.

The move, which will see the company sell its tobacco stocks and run off existing bond holdings in the sector, will not prevent Axa Investment Managers’ funds from holding such assets, but highlights the growing prominence of ethical approaches among both institutional and retail investors.

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However, fund buyers have warned that the potential drawbacks of this approach need to be made clear to investors, with suggestions ethical concerns should be treated similarly to attitudes to risk.

Ethical investing, as opposed to sustainable or environmental, social and governance-focused stockpicking, is a more limited space in the UK retail market. It commonly focuses around exclusion policies centring on the likes of tobacco firms and arms manufacturers.

One commentator, who did not wish to be named, said ethical approaches should be covered in client questionnaires similar to risk-tolerance.

He said: “Ethical investing can be very personal. If I impose my morality on you it could be affecting your returns, positively or negatively.

“That needs to be treated almost like an attitude to risk. It shouldn’t wash if I put an ethical investor into an unethical investment, but it shouldn’t wash the other way either.

“If you avoid areas like tobacco and they perform well, those consequences need to be clear.”

Rob Morgan, pensions and investments analyst for Charles Stanley, said the potential for exclusion meant some ethical strategies could be subject to additional volatility. He suggested the implications and potential loss of returns from ethical investing was still not being made explicit to clients.

“Clients need to understand the limitations imposed by an ethical or [socially responsible investment] strategy and that these may have a bearing on the risk, in terms of volatility. Therefore, in the advice process it is right to bring this up in the risk-assessment stage,” he said.

However, Mr Morgan noted that an ethical overlay had “historically increased volatility for equity funds” because this approach tended to exclude many large companies and tilt managers towards a heavier use of small and mid-cap stocks.

Despite this, the strategies are becoming more popular. According to figures from the Investment Association, assets under management in ethical funds reached £11.7bn in March, up from £10.3bn a year earlier.

However, the number of ethical-labelled funds available to fund buyers is limited to 24, and the correct implementation of relevant guidelines remains elusive to portfolio managers.

Charles Hepworth, investment director at Gam, said it was difficult to design an ethical portfolio without avoiding most of the market.

“Like the EU, as a concept it is admirable, but as a working solution it remains prone to logistical problems,” he added.