This week in Stockhead’s Ethical Investing series we look at what portfolio management looks like for ethical funds. Stockhead spoke with Ian Woods, head of ESG Investment Research at AMP Capital.

Among AMP’s offerings is the Capital Sustainable Share Fund which is RIAA certified. Last week Stockhead spoke with RIAA CEO Simon O’Connor. What surprised us the most was that their issue wasn’t their own standards, rather it was the standards the companies set on themselves.

Read More: Want to be ethically certified? RIAA CEO Simon O’Connor tells how

This was because there was no ethical standard to meet and investors had different expectations and meeting them was a challenge for a fund provider.

“One of the challenges is there is no perfect company,” Woods told Stockhead.

“You can always find something which you think [a company] could improve on.”

Ethical Portfolio management 101

Of course consumers want to do good rather than just ‘do no evil’. But because the latter is usually more straightforward than the former, this is an appropriate starting point.

Woods said AMP has two principles. First, respect for humanity and intrinsic human rights. Second, if harm exists, the degree of it. This was revealed as the framework used to exclude tobacco and weapons as ‘no go zones’.

This is not just companies that directly manufacture these products but that have exposure to them. Exposure can change as a result of mergers and acquisitions.

Woods noted while some may refuse to accept any investment in alcohol, others might accept a miniscule amount. But the change of this as a result of mergers and acquisition was something to keep an eye on.

Climate change and human rights are the two issues RIAA named as most important. So what does AMP Capital do?

“We certainly track what our carbon footprint is on an annual basis but you can assess it more regularly than that,” Woods said.

“When you’re looking at things like human rights, what I think fund managers are looking at is controversy.

“Alert[ing software] is being used by fund managers to keep track of their companies and potential issues for ethical investors.” Woods listed bribery and scandals as the two key words to look out for.

But you’ve still got to make money…

Of course, ethical investing still has to make money. But what balance should you give between finance and ESG metrics?

As Woods noted, each fund manager is different. But naming the Sustainable Share fund he said, “the portfolio is driven entirely by ESG issues. 100 per cent of the time.”

“Other fund managers may get a universe they can invest in and a lot of that may not change so they will just do their normal processes.

“It depends among fund managers, how much time they spend and how intrinsic or how important those issue are to the culture of the team managing the money.”

This extra “red tape” can be beneficial. While he cautioned against making generalisations that ethical funds perform, he did note ethical analysis can be beneficial.

“Over a five or seven year period typically you would see a well-managed ethical fund or ESG fund performing as well if not better than the index,” Woods said.

“I think the reason is the exclusionary analysis that goes into those funds, identifying stocks where there might be strategic headwinds or governance issues for the business.”

Who invests ethically?

Earlier this year, a UK study found 84 per cent of millennials saw ESG focused investing as a central goal.

Woods said among AMP’s client base it was more common to find, “people who feel like they want to leave a legacy and obviously a positive legacy”.

“They don’t want to be investing in companies which are not supporting that positive legacy, they want to provide,” he said.

“So high net worth individuals who are thinking like that would certainly be interested in these funds – as well as impact funds.

‘[They are interested in] investments which provide positive financial returns but also social or environmental returns.”