I sat down with one of the advisers and directors here at Co-Navigate to find out about one of the areas he’s been doing a lot of work in recently; ethical investing. Here’s a transcript of our conversation.
TH: Hi Andy, can you start by giving us a bit of background on who you are and what you do?
AM: Hi, yes, I’m Andy Mathers, I’m a financial planner and my main aim with regards to my role is to help clients meet their financial goals. A key area of this work is advising on investments and pensions.
TH: You said you work predominantly with investments and pensions, is there a particular area of this that you are focusing on currently?
AM: Yes, we have a special focus on investing ethically as we feel it’s very topical for clients and an area of concern for them. They want to make sure that their investments fit not only with their financial objectives, but also with their ethical views and beliefs.
TH: Why do you think that that is of particular interest to you and to your clients?
AM: I think it’s probably always been of interest to folk, but it’s been more predominant of late because ethical investing is starting to be seen as more mainstream. Certainly in America, the percentage of investments made in a socially responsible or ethical way is up to about 20% of investments now, whereas it was 1% around 15 years ago; so the number of people choosing to invest with their conscience as well as their standard investment objectives has risen substantially. Investor criteria has definitely changed.
TH: What sort of client would ethical investing appeal to?
AM: Good question, I think a variety of clients. I think anyone who wants to invest with a conscience as well as their head may, in the very least, appreciate their ethics being taken into consideration. Many folk have very strong views on the kind of investments they’re happy with but others may only be slightly concerned about making sure their investments fit with certain beliefs. So, there’s quite a spectrum; from those who we would describe as ‘ultra green’ (that’s people for whom we would say they really are concerned to the absolute nth degree with what they’re doing) to those clients who we would describe as ‘light green’ (they’re the type of investor who says, ‘Actually, I want to invest to make money and if you could take into consideration these views as well, that’d be great!’)
TH: So, would you say that there are people for whom ethical investing wouldn’t be suitable?
AM: No, we don’t determine that for our clients. We just ask the client the question and let them decide whether they want us to take their views on social things, environmental things and other beliefs into account. In other words, we don’t want to pigeon hole our clients into those who are ethical and those who are non-ethical, we simply want to allow for their views to be taken into consideration when making suitable investment recommendations for them. For some clients, it’s not a concern, for other clients it’s really important, and for many clients it’s somewhere in the middle.
TH: How does the normal investment process work and how is the ethical process different?
AM: Our standard investment process (in-line with most other financial planners) is to look at what a client’s objectives are in order to find out what their financial situation is now and what they are trying to achieve. Once we’ve established a clear picture of what a client wants to achieve, we then look to invest their money in a suitable way. What do we mean by ‘suitable’? We want to make sure that we are looking for the right amount of risk compared to the reward the client is looking to obtain. So, for some clients, they don’t mind taking a lot of risk; they don’t mind the value of their investments going up and down, if in the long-term there is a good chance of making a good level of returns on that money. Others may be less comfortable with this fluctuation in the value of their investments. Our standard investment process is to find out what a client wants to achieve, how much risk they’re willing to take on board and then make a suitable recommendation based on that. A key part of this process is the action of diversifying a client’s investments.
With ethical investments, we start by applying a client’s ethical values to the market and filtering out funds that don’t meet their criteria. This is a key step in ethical investing but it is also one of the biggest downsides as it immediately restricts the number of funds that the client can actually invest in. You’re essentially reduced to putting more of your eggs in one basket for want of a better phrase. You’re less able to diversify, both in terms of the assets that they can be invested in (such as shares, bonds, gilts, property and commodities for example) and where you are investing geographically.
In summary, the biggest difference is that with standard investments, you’ve got a wider focus of what you can invest in, whereas with ethical investments there’s a narrow range of funds you can choose from.
TH: How would you select the funds for an ethical client?
AM: As with a standard investment, our first concern is to find out what a client wants to achieve and then additionally to find out what their beliefs and ethical views are and what they’d like us to take into consideration. We use a questionnaire to help us with this. We look at negative criteria; are there certain companies you want to avoid such as those that produce pornography or promote gambling? Other clients may be more concerned with looking at positive criteria; do the companies look after their work force? Do they promote renewable energy? Those sorts of things.
So, we help clients identify what’s really important for them; positive factors, negative factors and which areas of these are most important. For some clients the environment may be really, really important; for others it may be human welfare. There’s a real spectrum of ethics that are important and what we really want to do is make sure we are recommending investments that are suitable for the individual, which meet their ethical requirements.
TH: Yes, and funds that still meet their attitude to risk and capacity for loss as well?
AM: Yes, spot on, that’s fundamental too.
TH: Take out your crystal ball, do you have any predictions for the ethical marketplace going forward?
AM: Guessing in financial services is always almost impossible, but I think it’s fair to say that the investing trend in Europe is similar to that in America, although several years behind. As I said earlier, investing in America has gone from 1% of investments being on an ethical basis 15 years ago to about 20% in 2017 and we think that the European market will go the same way. The UK often leads Europe in terms of this and in the last two or three years, we’ve seen a lot more investment providers bringing out ethical funds or targeted funds that look at the environment or other issues. We feel that’s going to happen more and more and as new investment funds come on the market, people will have more choice and so more people will be able to make sure that their investments fit their ethical requirements going forward.
TH: Last couple, Andy… Are there any downsides to ethical investing?
AM: Let’s start with the upside first! The upside is that you get investments that you are comfortable with, you’re happy to invest in those companies. Recently ethical investments have tended to do very well; an example would be, renewable energy. Lots of money worldwide is being pumped in to renewable energy so ethical funds that have focused on renewable energy have done really well as more money is channelled towards them and less is channelled towards oil and coal. Recently we’ve found that ethical funds have done very well because some areas that are of concern to ethical investors are being promoted on the world stage.
The key downside to ethical investing is that we aren’t able to diversify as much as we’d like. We try to make sure that clients don’t ‘have all their eggs in one basket’, and the problem with ethical investing is that there aren’t enough funds out there to diversify investments as thoroughly as we’d like to do. Our standard portfolios have 14 or 15 investment funds in them increasing diversification, whereas our ethical portfolios tend to hold 6, 7 or 8 funds, so there’s less investment manager diversification. There’s also reduced asset diversification as well because there aren’t, for example, that many ethical property funds being sold currently in the investment marketplace.
TH: Has Co-Navigate’s success as a company been because you focus on ethical investing?
AM: We believe we’re being successful because we’re working alongside clients and helping them meet their financial goals. We’re helping clients identify what their goals are and helping them meet these; ethical investments are just a part of that process of helping a client get from where they are now, to where they want to be. Working with clients is the best part of my job and I am always happy to hear from new people looking to start putting their financial plan in place.
TH: Brilliant, thanks very much Andy.