3 November 2017

 

NOTE TO READERS: If you jumped to this page ‘out of the blue’ then please know that it is part of a bigger article about investing in stock to promote sustainability, elsewhere on this website.

 

Sustainable investment funds and their flaws

So, ‘sustainable’ investment funds and ‘social responsibility’ funds seemed my way to go. But, what do banks and investment firms mean with those phrases? I prefer to be lazy when it comes to my investments, but I still want to know what my money will support. So, I checked a newspaper’s stock exchange pages for Swedish funds for names that sounded like sustainable, environment, social, ethical, etcetera. In the course of 2017, I looked them up to find out how they operate, in which companies they invest (usually the top 10 companies with biggest investments are listed) and, hopefully, how they select.

These are the ones I found and checked, sorted by fund-managing company:

• CB fonder : SaveEarth IC/ID/RC
• DNB : Renewable Energy
• SPP fonder: Grön Obligationsfond
• Handelsbanken : Hållbar Energi
• Länsförsäkringar : Global Hållbar
• Nordea : Klimatfonden
• SEB : HållGlobal
• SEB : WWF Nordenfond ( previously Östersjö/WWF)
• Skagen : Kon-Tiki A (invests in developing economies, but includes countries that I wouldn’t want to support)
• Skandia : Världsnaturfonden
• Solidar : Etisk Plus
• Swedbank : Ethica Sverige
• Öhman : Sverige Marknad Hållbar A

Perhaps your Swedish is suboptimal and you can not guess all terms. ‘Hållbar’ means sustainable, ‘grön’ means green, ‘världsnatur’ literally means world-nature but refers to the WWF.

Actively managed sustainable funds and indexes

Most of these funds are so-called actively managed, which means that people are making the selection of the stock in which the fund invests. The two books that I mention above warn that, firstly, this manual labor costs money and you are paying for that. Indeed, for the funds that I checked, one pays about 1,5 % per year (Probably that is 1,5% of the total you own in the fund). Secondly, these funds on average and in the long-term do not do better than index funds. A Financial Times article of 16 September 2016, provides the same insight with the title ‘More than 90% of actively managed US funds fail to beat their benchmarks’ (I found a copy here). Of course, I want to earn some money with my money but only after I know that it supports the planet and humanity.

Okay, but what about index funds, are there no sustainability indexes out there? That would make it easy for me: just buy stock that ranks high on those indexes. Well, yes, there are. There is the sustainability index of Morningstar and I found one or two others. Unfortunately, they have a glitch: no documentation on criteria – or perhaps behind a pay wall. Just like with the funds, I do not just want to hear the word sustainability and then blindly follow. I do want to know what it means and I could not find out how these indexes are compiled. If you can do better, then please let me know.

How do they select?

In some cases the fund’s name explains it all. ‘Renewable energy’ and ‘sustainable energy’ give a good indication, although one may still wonder if nuclear energy is considered sustainable. Some people think so, but I do not. When it comes to the other funds’ names, they are completely opague.

The ones referring to WWF made me curious. WWF Nordenfond claims to follow certain sustainability criteria which observe the UN’s Global Compact guidelines and the OECD’s guidelines for multi-national corporations. One percent of the fund’s capital is annually donated to the WWF, provided that the capital increases with at least one percent. Okay, that sounds good, even though I am not familiar with the UN and OECD guidelines. However, in the fund’s 10 biggest shares are five banks and or investment companies which I would not particularly call sustainable. The other five score a 0 as to my ‘criterion 1’, which means not particulary pro-active nor particulary bad for sustainability in my view (see the main article). For Skandia’s Världsnaturfonden goes something similar. Companies that do not comply to WWF’s guidelines are not supported, and otherwise, they observe the ‘Svanens miljömärkning’ (The name roughly means ‘Swan’s environmental score’which I did not look up). When I checked, this fund had three banks and on gambling company in their top 10, all of which I rank -1. The remaining  6 score a 0 on my criterian 1.

One may not be impressed, but at least these two provide some explaination. I found no explanation at all, nor a top 10 of largest-share companies when I looked up Solidar Etisk plus. Swedbank’s Ethica Sverige does a bit better. It explains that it poses ‘tough demands’ on environmental, human rights and labor conditions of the companies it invests in but without further making these demands explicit. (“Ethica är våra hållbarhetsfonder och vi ställer hårda krav vad gäller miljöarbete, mänskliga rättigheter och arbetsvillkor på de företag som får ingå i fonderna.”). Here too, three Swedish banks are in the top 10 and otherwise companies that score a 0 on my criterion 1.

More of this, one finds at Öhman’s Sverige Marknad Hållbar. Skagen Kon-Tiki A observes the UN PRI principles for responsible investments, but ends up investing most in Samsung and Hyundai, which both do not mind to build nuclear power plants. I could go further down the list of funds that I checked, but I guess you get the picture.

Is there nothing more positive to mention? Yes, CB Save Earth Fund has three companies in it’s top 10, that score a 1 on my criterion 1. Handelsbanken’s ‘Hållbar Energi’ has four of those. That sounds good, but I doubt that these companies pass my other criteria and even if they did,  that would still mean that only about 20% of my investments in these funds would have my support. Admittedly, that percentage could be higher if all the funds’ investments were considered, but I do not expect a lot on this point.

Actively improving the planet and humanity

Going through the data of these sustainable funds, I notice that most companies in which they invest fail to actively improve the planet through their main activities. Let me explain.

For example, five of the funds that I checked, invest in IT companies in general and Apple in particular. I fail to see what is so green or ethical about them. They make micro electronics and software. What is so inherently good about that? Perhaps they do it in an ethical way, but so far that is not  what these companies are known for. Even worse, questions can be raised about where they get their raw materials and how they treat their employees or allow their sub-contractors to treat their employees. In fact, until recently, I knew of only one company, Fairphone, that really puts in an effort concerning sustainable IT (*).

Six funds invest in companies that produce cars or car parts. Five years ago, I would not consider them at all as companies that improve the state of the planet. Now, I realize that if they manage to change towards electrically driven cars, that would make them more interesting. Still, I am wondering what it would mean if the entire world would drive electrical vehicles. However, for the time being, I give them a 0.

While browsing the lists of companies, I realized that what made me dissatisfied is that most of these companies at best can be said to do little harm to the world. There are some that pay a lot of attention on their websites to ‘Corporate social responsibility’. Assuming the companies act as advertised then that is good. However, it is not good enough.

Suppose that you find an oil company that uses sustainably-mined metals for its machines, and that treats its employees with the utmost respect and pays them well, even the Philippine deck hands on their tankers. It would still be an oil company, perhaps even one that practices fracking.

So, since I have this feeling that things are not improving fast enough, just doing no harm is not good enough. The companies that I want to invest in should do both: operate responsibly towards humanity and trying to improve the planet. So I need to find some that do better.

Continue reading …

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(*) The other week, a Fairphone newsletter pointed me to Greenpeace’s 2017 Guide to Greener Electronics. According to this report, Fairphone is not in the Greenpeace’s A category, but it is ahead of the rest. Some of the rest is far behind, but HP, Dell and Apple are close to Fairphone.