Many pension funds own BP shares, but should green or ethical funds invest in it as well?
Some ethical funds have been criticised for investing in BP – if you’re thinking of investing in green or ethical funds, it’s vital to look in detail at their approach.

If you decided that you wanted your money to be invested ethically would you want to invest in a fund that bought BP shares? In view of the current storm of criticism over the explosion and oil spill in the Gulf of Mexico, possibly not. But you can't assume an ethical or environmental fund will take the same view. When I was writing my book called Green Money it became clear how different 'ethical' and 'green' funds' can be.

Can an ethical fund invest in a company like BP?
Many of us have strong ideas about what makes a company ‘ethical’ or environmentally friendly. The problem is that we don’t all have the same idea. BP isn’t the only company that ethical or green investors might have problems with - Tesco is the name that comes up most frequently (I wrote about this in an article called ethical shares: where funds draw the green line in the Guardian last summer).

Why ‘ethical’ funds might invest in a company you don’t approve of
In an ideal world, ethical funds would only invest in companies that behave, well, ethically all the time. The problem is that this would only leave a very limited pool to choose from and – for most people – that would mean taking on far more risk than was healthy.

Instead, ethical and green funds have their own criteria by which they work out whether a company should be in or out:

Positive or negative screening
Some ethical funds will screen out companies that they don’t think meet their criteria while others will choose to actively invest in the ‘best in the sector’. Many ethical funds do both.

Either way, says Helen Tandy of ethical independent financial advisers Gaeia, oil and gas companies are likely to feature in ethical funds' shareholdings. "Even the larger green funds will often invest in oil on a best of sector basis and will have had holdings in BP, Statoil and BG. Many of our clients have concerns about investing in oil but realise that it is currently used in our daily lives."

SAVVY TIP: If you’re thinking of investing ethically, it’s vital that you (or your independent financial adviser) look in some detail at the criteria that the fund uses to judge whether a company is one it should invest in. Some ethical funds focus on excluding companies with a bad human rights record or those involved in cigarette manufacturing while others have a stronger environmental emphasis. The website yourethicalmoney.org has detailed information about ethical investment funds.

Within funds that screen companies positively, negatively or through a mixture of both, there are two ways that the oil and gas sector could be assessed:

• The oil and gas sector harms the environment. Oil and gas companies should be avoided because of their impact on the environment.

• Some oil and gas companies are better than others. Some funds take a pragmatic view, acknowledging the fact that we use plastics, heat our homes with gas and drive cars and are still heavily reliant on gas and oil. In this case they'd invest in what they saw as the 'best of' the sector.

SAVVY TIP: Funds that invest in oil and gas companies should assess individual companies within this sector. Mark Robertson of EIRIS, which provides information on ethical and green investment, says that although they’ve flagged up concerns about BP’s health and safety record in the past, it has scored well in other areas. “Our research has scored BP well for openness and transparency and some funds will have decided that it’s a company they can invest in.”

Engaging with companies they invest in
Funds that engage with companies they invest in don’t have to screen out any companies as being unsuitable (although some of them combine an engagement approach with positive or negative screening).

SAVVY TIP: A fund that engaged but that did not have the strictest environmental criteria would be likely to invest in oil and gas companies.

• Engaging means that they talk to and put pressure on these companies to improve their practices.

SAVVY TIP: The engagement approach would generally be to stick with a company in a crisis and to use that as an opportunity to bring about change. However, companies will only change if there’s a business case for doing so (which in BP’s case, you could argue that there is as the share price has fallen so dramatically).

• The argument against an ‘engagement only’ approach that it can be hard for consumers to find out whether these funds are genuinely active in challenging firms whose practices they don’t approve of.

How to avoid oil companies (or other stocks you don’t like)
If you want to get information about the criteria an ethical or green fund uses when deciding whether or not to invest, I’d recommend that you start with yourethicalmoney.org, where you can find out the criteria for each ethical, green and engagement fund. If you want more detail you can:

• Look at the list of top ten holdings. You can find this on the fund provider’s own website under ‘fund manager’s factsheet’ or ‘monthly update’.

SAVVY TIP: If this information isn’t obvious you can access it via information websites such as Trustnet.com and Morningstar.

Related articles:

What's important to you when it comes to ethical investing?

Why cautious funds may not be so cautious after all

Do you care what your bank doe with your money?

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11-06-2010
02-01-2012
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