Everyone's deﬁnition of 'ethical' is different and as such, so is everyone's idea of ethical asset management. The same applies to fund managers that market their funds as ethical - not all will share the same views or adopt the same strategy for selecting stocks for their funds. Ethical asset management has evolved over the years and today there are many different ethical investment strategies such as; positive and negative screening, ESG (environmental, social & governance) investment, engagement, values based investing and impact investing. All follow a different investment process for selecting stocks, but all have one common goal - to serve a broad range of socially responsible investors.
TAM's ethical asset management process
Our investment managers follow a rigorous investment process, conducting extensive research into the universe of ethical funds. This research includes one-on-one meetings with fund managers to gain an in-depth understanding of how the manager’s construct their ethical fund universe, and how this universe is ﬁltered down to produce the ﬁnal portfolio. In addition to manager meetings, the team conduct detailed desk-based analysis which looks further into the fund’s investment process, portfolio positioning and track record of performance, to ensure that the fund is delivering on its mandate and will indeed be a valuable addition to the TAM Ethical portfolios. Below is a brief overview of the main types of ethical investment styles. Funds may adopt these individual strategies in isolation, however they often combine them to deliver a broader and more diverse ethical investment strategy.
The most traditional form of ethical investing, negative screening excludes specific companies or industries from the investment universe that do not adhere to a fund’s pre-determined ethical criteria. These companies will typically produce products or services, or have business practices, that do not align with investors’ moral principles. Common exclusions include companies involved in the production or distribution of alcohol, tobacco, armaments and pornography.
Ethical investing can be approached from an alternative angle through positive screening, which concentrates on inclusion rather than exclusion. The aim is to identify companies that are making a positive contribution to society and/or the environment through the products or services they provide. Positive screening criteria may include companies that are involved in creating renewable energy, tackling poverty and promoting ethical employment practices.
Environmental, Social & Governance (ESG)
The broadest of definitions. Environmental, Social and Governance (ESG) considerations are being integrated into the investment processes of a growing number of funds, including mainstream funds which do not have an explicit ethical focus. Funds are recognising the benefits of considering ESG factors from a risk mitigation perspective. They recognize that firms which do not take these considerations seriously are at risk of suffering tangible losses as a result of poor practices, which ultimately impacts share price.
Engagement is often carried out in conjunction with the other approaches to ethical investing which we describe. Its focus is on talking to company management about ways in which they can improve their practices and standards. Targets are often set and funds will generally disinvest in a company if it fails to meet those targets for improvement.
Impact investing aims to support companies producing tangible benefits to society and/or the environment, alongside financial returns. The key factor that differentiates impact investing from positive screening is the emphasis on measurement and intentionality. Companies must be able to quantify the impact they are generating, which should be intentional as opposed to being simply a by-product of a process already in place. The benefit of this is to encourage accountability and transparency.
The TAM Ethical models incorporate a variety of the investment styles described above, taking full advantage of the developments that have taken place in the ethical market, which has seen the range of styles and approaches grow dramatically. We aim to appeal to a wide range of socially responsible investors and provide portfolios that best suit their socially responsible, as well as financial requirements.
TAM is a member of the United Kingdom Sustainable Investment and Finance Association (UKSIF), who promote responsible investment and other forms of finance that support sustainable economic development, enhance quality of life and safeguard the environment.