Ethical Funds use a variety of criteria and approaches to exclude and approve companies for investment. For the purposes of this guide each fund has been rated based on its approach in each of three areas, Animals, Environment and Social.Some funds operate criteria in all three areas, whilst others may focus or specialise in a particular one.
We have not applied a strict scoring system to establish a rating, but relied on a more subjective overview using our many years of experience of matching client ethical concerns to available ethical funds. Our general approach for the guide is to establish an average position in each of the three main areas, then rate each fund as better (more strict) or worse (less strict) than the average position. These are marked with a plus rating or a below average rating respectively. A double plus rating is also shown where appropriate this denotes a fund specialising in that area, or applying a particularly strong set of criteria.
The three main ethical areas are described in detail below, with the definitions used in making the ratings assessment:
This category covers issues arising from company activities that impact on people, or society at large. There are a wide range of ethical concerns that may be excluded by ethical funds, ranging from involvement in alcohol, to human rights.Positive assessments may also be made to find suitable investments, for example, companies making products for education or advancing human health. A company's positive policies may also be assessed, for example, how they treat their employees or whether they make contributions to charities and the community.
The negative criteria applied by funds to exclude companies can be divided into three broad areas: firstly, commonly avoided activities directly relating to a company's activities, such as alcohol, gambling, pornography and tobacco. Secondly, concerns over involvement in the armaments industry, ranging from direct manufacture of weapons, to more tenuous defence related contracts for non-strategic items. Lastly, but not least, the complex area of human rights, and how these may be impacted by a company's activities.
Double Plus - Those funds that apply a detailed range of criteria across a wide range of issues and that are particularly strong in one or more areas. The funds analysis may use a scoring system, view issues in a sustainability context or provide separate position papers on particular subjects.
Plus - Those funds that have a range of both positive and negative criteria, which must cover core areas such as armaments and human rights issues.
Average - Funds that cover a range of negative exclusions applying to armaments, human rights and a selection of other relevant issues. A non-qualified positive statement may also be found on these funds.
Below Average - Funds that apply a limited number of criteria that apply to social issues, or where criteria are poorly defined. These funds will not apply a detailed assessment to core areas, such as human rights or armaments issues.
The issues surrounding animal welfare covered by ethical funds commonly focus on animal testing, and in this area some less subjective definitions can be applied to the ratings, as described below.Other animal welfare concerns often excluded are the use of animals for food, for example intensive farming and the processing and retailing of meat products. Some funds also exclude other animal issues such as the use of fur. The ratings rely on an assessment of client expectations on avoiding key issues of concern, rather than an objective analysis of animal suffering.
Double Plus - Funds that exclude companies involved in medical animal testing, non-medical animal testing, intensive farming and the sale of meat (to a greater or lesser extent).
Funds that exclude companies involved in medical and non-medical animal testing as a minimum.
Average - Funds that exclude companies involved in non-medical animal testing as a minimum.
Below Average - Any fund that does not exclude companies involved in non-medical animal testing will receive this rating, irrespective of other animal related issues.
The approach to environmental issues taken by funds is broad ranging, but falls into three main themes: the exclusion of companies based on negative impacts; investing in companies that are taking positive steps to manage their impacts; and investing specifically in companies that provide environmental services or technology. Some funds operate in only one of these areas (or none), whilst others may apply all three.
Within these three areas a fund's criteria also vary widely. Sometimes basic unqualified statements are made, for example to avoid environmental damage, or favour a positive environmental record.Other funds take a much more thorough approach, listing a range of environmental activities of concern and applying detailed assessments of company management approaches to find suitable positive investments. The ratings aim to take account of these broad approaches and it should be noted that there is a certain amount of subjectivity in the definitions below.
Double Plus - Funds which apply a detailed assessment of company impacts, for example operating a sustainability matrix or other scoring system. Also given this rating are funds that invest wholly, or with a specified proportion, into environmental solutions such as alternative energy or recycling.
Plus - Those funds which use a balance of positive and negative criteria to assess companies suitable for investment.
Average - Funds that exclude companies based on predominantly negative criteria, such as avoiding unsustainable timber extraction. This category may also include funds making unqualified positive statements.
Below Average - Any fund that has no specific policy on the environment, or that has an unqualified statement, for example to avoid 'environmental damage'.