Investing ethically via passives

This article is part of
Guide to ethical investing

“These have been facilitated by the increased growth and demand for sustainable indices from the likes of MSCI,” he adds.

“In the UK, the FTSE4Good index has provided an opportunity for fund groups to offer investors trackers. ETFs are also increasingly providing one-stop solutions to thematic investing, such as clean energy, or water. So on the face of it, yes, it is possible to invest ethically via passives.”

The FTSE4Good Index Series was launched to measure the performance of companies demonstrating ESG practices and uses what is describes as “clearly defined” ESG criteria to do so.

Mixed response

Online platform Selftrade reports the number of customers investing in green and socially responsible ETFs via Selftrade rose by 237 per cent in 2017, compared to 2016.

Mark Taylor, chief customer officer at Selftrade from Equiniti, says: "For investors who want to spread their risk, there are now a number of options, with many mainstream providers offering ‘green’ funds that invest using a variety of criteria.

"It’s worth also considering ETFs; there are a number of low-cost equity and bond smart-beta products that track specific socially responsible investment (SRI) indices."

Ones that Mr Taylor likes include:

  • iShares Euro Corporate Bond Sustainability Screened 0-3 year Ucits ETF (SUSE), for example, excludes debt from companies that are involved with controversial weapons, such as cluster bombs, land mines and chemical and biological weapons.
  • UBS ETF World Socially Responsible Ucits ETF (USD) invests in some of the most well-known global companies including Microsoft Corporation, Procter & Gamble Co and Walt Disney Co.

While passive products usually go hand in hand with lower fees, there are some who question whether this applies to ethical passive products.

Investing ethically via passives is expensive, according to Gary Waite, a portfolio manager at Walker Crips.

“Some products are available but there’s very little choice – typically they’re small so have extra liquidity considerations and they are at a premium to ‘standard’ ETFs, despite a limited track record,” he says.

Mr David agrees that historically, fees have not been as competitive for ethical/thematic ETFs as they have for more conventional ETF products.

“This is beginning to change, but one should not assume that this route is always cheaper than some of the active funds,” he suggests.

His main issue though is with the strength of the screen or investment restrictions that apply in passive investing.

“Some of these are more robust and based on a mix of positive ESG criteria and value-based exclusion criteria. 

“For example, MSCI SRI indices avoid companies with over 5 per cent of revenue derived from gambling and all tobacco manufacturers, retailers, distributors and suppliers deriving over 15 per cent of revenue. 

“But others, including many mainstream ethical passives, have a more limited screen - Vanguard SRI Global includes Exxon and Royal Dutch Shell in its top 10, for example, and the FTSE4Good trackers have a large weighting to oil and gas (over 10 per cent to Royal Dutch Shell) and mainstream pharma,” he explains.