Managing an ethical investment portfolio can be as hard as giving up smoking

Taking the moral high ground could lose you money, even if it makes you feel better

Axa says it no longer sees tobacco as an attractive investment (AFP/Getty Images)

It is easy to be cynical about the announcement by the French insurer Axa that, for ethical reasons, it will no longer invest in tobacco companies and will offload £1.3bn-worth of investments it holds in such businesses.

In fact, tobacco shares have been on an impressive run this year – up close to 10 per cent already – but their future looks troubled, given the number of people giving up smoking and increasingly stringent restrictions on packaging. It looks like a good time to cash in.

In the UK, just 19 per cent of adults now smoke according to Action on Smoking and Health (Ash), down from 27 per cent two decades ago.

However, investors in tobacco businesses have more reason to be optimistic about their prospects than you might think. While smoking is on the decline in Western markets, the opposite is true elsewhere. In developing economies, with huge populations in Asia and Africa in particular, smoking is growing strongly – up by more than 50 per cent since 1990 according to Ash’s estimates. Moreover, the big tobacco companies are all eyeing the fast-growing e-cigarette and vaping market as a potential new source of revenues.

In fact, the sector is so attractive that some investors that have previously pulled out of tobacco stocks are now considering making a return. In the US, the giant pension fund CalPERS has published analysis suggesting that its withdrawal from tobacco five years ago could now be costing it more than $100m every year in lost returns. It is now considering whether to give up giving up.

At Axa, however, senior managers insist they are right to take the moral high ground. The company wants to “support the efforts of governments around the world” on reducing smoking, it says, and feels increasingly uncomfortable with holding shares in companies whose products are harmful to health when one of its most important lines of business is health insurance.

So if you’re a customer of Axa who shares its view that big tobacco is a nasty industry to be avoided, you can now surely rest assured that your money won’t end up in such investments, right? Well, don’t rush to that assumption. In fact, Axa’s announcement only applies to its own holdings in the tobacco industry – and, crucially, not to the funds its Axa Investment Managers arm runs on behalf of thousands of investors all around the world.

If you invest in one of those funds, you’ll have to check what its managers’ policy is on tobacco investment – or even whether it has one.

But this is just the latest example of the dilemma faced by anyone who wants to invest in accordance with their principles. While it’s simple enough for you personally to avoid direct investments in companies with which you feel morally uncomfortable – whether tobacco stocks, shares in weapons manufacturers, businesses that pollute the environment, or something else – as soon as you give your money to a third party, the waters get very muddy very quickly.

Just ask staff at the British Heart Foundation, for example, who were shocked to discover a few years back that the charity’s pension fund invested in a number of tobacco companies despite the links between smoking and heart disease. Or what about the Church of England, whose past investments have included payday lenders and arms companies?

Broadly speaking, there are only two ways to be sure your money isn’t being invested in companies that you don’t want to support for ethical reasons.

The first option is to check individually with every organisation that manages money on your behalf. That means fund managers, including Isa providers, pension companies and your workplace pension scheme, but also charities and similar bodies to which you give money; you should also think hard about the banks and building societies where you deposit money, as they may make loans to companies you don’t like.

Only by asking every one of these organisations what their policy is on investing in certain types of company can you be sure whether your money is at risk of ending up somewhere you don’t want it to go. If there is no policy, it’s possible you’ll be an investor in such companies – either now or in the future.

Option number two is to save and invest only via ethical or socially responsible financial services companies and funds. These organisations explicitly avoid any dealings with specified industries, so that you can too. Even here, however, you’ll need to read the small print – different providers take different views about which industries should be avoided and how exactly to screen out them out.

Are ethical investment funds for you?

Patrick Connolly, a certified financial planner at independent financial adviser Chase de Vere, warns ethical investment funds require a degree of compromise. You’ll need to accept that no single fund is likely to have a policy that sits perfectly in tune with your specific values. Also, ethical investment funds will deliver a different type of return: there will be times when they miss out on the gains made by shares they avoid, plus performance is likely to be more volatile since they are more likely to invest in smaller businesses.

Against that, many specialist ethical investors argue that companies that engage in immoral businesses or are socially irresponsible will perform less well over the longer term. They’re likely to face regulatory sanction, political action such as higher taxes, and to suffer from reputational issues.

From a broad universe, Connolly recommends a number of ethical funds for those minded to invest in this way. “We like Aberdeen Ethical World Equity, Standard Life UK Ethical, Kames Ethical Equity, Kames Ethical Corporate Bond and Rathbone Ethical Bond funds,” he says.