Sustainable Investment is not the same as Ethical Investment

A high sustainability rating might suggest a fund is doing all the right things in respect of its environmental, social and governance obligations - but is it ethical?

03 March 2020

The latest annual report of one of the UK’s largest companies has a section headed “External Recognition in Respect of Sustainability”, which lists these achievements:

  • Named as one of the most sustainable companies in the world in 2019 by SEAL Business Sustainability Awards…which recognises overall corporate sustainability performance;
  • Included, for the 18th consecutive year, in the Dow Jones Sustainability Indices – being the only [company in this sector] included in the World Index which represents the top 10% of ESG performers;
  • Named within CDP's Climate A List (recognising our actions to cut emissions, mitigate climate risks and develop the low-carbon economy) and awarded a position on CDP's Supplier Engagement Leaderboard, recognising our actions to engage with suppliers to manage climate risk and reduce Scope 3 carbon emissions in our supply chain;
  • Accredited as a Global Top Employer – acknowledging our commitment to provide best-in-class working environments and career opportunities;
  • Ranked in the top 10% of companies in the Financial Times Diversity Leaders report; and
  • Recognised for best practice by the International Women's Day Association.

Impressive list, isn’t it? This company would no doubt have a high sustainability rating and is doing all the right things in respect of its environmental, social and governance obligations. So, every fund looking to appeal to sustainability-conscious investors should hold this stock, shouldn’t it?

The company is British American Tobacco (BAT).

Knowing the above, should advisers recommend or avoid funds holding BAT? Would investors be right to question the sustainability rating of a fund if it holds BAT?

I am not taking a stance on ethical investment, but I merely point out that ‘sustainable’ is not the same thing as ‘ethical’. Anyone looking to exclude tobacco (or any industry that may not meet their own ethical standards) should not solely rely on ESG/sustainability fund scores to filter their universe.

Investing in a tobacco company could, on the face of it, go against UN Sustainable Development Goal 3 – Good Health and Well-being. One of this goal’s targets is to “strengthen the implementation of the WHO Framework Convention on Tobacco Control (WHO FCTC) in all countries, as appropriate”. But the WHO FCTC relates mostly to demand reduction measures, such as taxation, exposure to smoke, shop displays, packaging, advertising, and education, i.e. things that can be controlled by governments.

This example also shows that sustainable investment decisions are not always black and white.

Fund groups, financial advisers and other professional investors, such as insurance companies and pension funds, operating in the EU (implications on the UK obviously pending) will soon need to consider and make disclosures relating to sustainable investments and sustainability risks (DSR). But there is no obligation to consider the ethics of their investment (unless these are set out in the fund’s prospectus, of course).

If an investor is particularly concerned about a fund’s ethical approach, the standard due diligence process applies. All publicly available resources including a fund’s website, fund factsheets, prospectus, company news and updates, financial reports, assessment of value reports and other resources used for fund selection and research, such as Trustnet and fundinfo, should help investors determine the inclusion (or exclusion) of a fund based on their personal ethical views.