Three important reasons why ‘ethical’ exclusions might not be right for your investments

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Personal Investments team

03 Oct 2019

It’s not going to come as a surprise that this summer was one of the hottest the world has ever seen and, understandably, that climate change is widely viewed as the biggest international threat.

People are taking action in all areas of their lives – using less plastic packaging, school walk-outs in protest, re-examining where the money in their pension funds and ISAs is going. And many feel that when it comes to putting their beliefs into investment practice, this means excluding certain ‘unethical’ sectors like oil or tobacco. But what does this actually mean for your potential returns? We asked our fund managers to look at what happens when you completely get rid of whole sectors.

 

 

You could lose your seat at the table

Owning any company’s stock gives you the right to have a say over how it is being run when there is a shareholder vote. By investing through a fund, you’re pooling your money with potentially thousands of other investors, making it impossible for a company to ignore us – something they could easily do if we weren’t investors at all. Take the case of massive British energy company BP – this summer it brought a vote on how its business strategy aligns with efforts to tackle climate change. This came after serious pressure from its investors such as us and HSBC. It doesn’t have to be a large amount but keeping even the smallest exposure rather than none means we can all change these companies for the better. As our friends over at This Is Money say, if you want to change the world, buy a company’s shares and tell them what to do.

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You could miss out on the renewable leaders of the future

The fact that the world doesn’t need as much oil as before hasn’t escaped the oil companies either. BP’s annual energy forecast predicts that renewable energy will be the world’s main power source by 2040. The most forward thinking among this sector are investing millions into the development of renewable energy so that they will still have a place in the future – from ‘big oil’ to ‘big energy’. The case for such a radical strategic rethink for all these companies is growing and excluding the sector entirely might mean inadvertently cutting off the supply of investment into the renewable solution.

You could be more exposed to the banks and tech leaders

Investing in a traditional index fund tracker – one that follows a basket of stocks like the S&P 500 or the FTSE 250 – means that more of your money is invested in the biggest companies. In the mainstream index funds, these are most likely to be tech companies such as Apple and Microsoft, or financial companies like Barclays and HSBC. So when you take money out of oil and gas companies, it gets reallocated on that basis with the money largely going to the financial and technology companies. This could be good news when markets are strong as these sectors are among the best performing over recent years. But as always, past performance is not a guide to the future. Concentrating even further in financial and technology companies poses the risk of bigger loss should anything go wrong for these sectors.

Does this mean all exclusions are bad?

Ultimately, to exclude or not exclude is up to the beliefs of the investor – it’s not up to us to tell you what you believe! For instance, a healthcare charity might never want its money going to tobacco companies, no matter what returns that sector might deliver. It’s all about making a more informed decision about the reasons for exclusion and what that might mean for your investment returns or and the associat

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Risk warning

Please remember the value of your investment and any income from it may fall as well as rise and is not guaranteed. You may get back less than you invest . Tax rules for ISAs may change in the future and their tax advantages depend on your individual circumstances.

Please note the information, data and any references in this article were accurate at the time of writing. Please check the date of the content if you’re looking for up to date investment commentary or tax-year related information.