Three important reasons why ‘ethical’ exclusions might not be right for your investments

4 December 2019

It’s not going to come as a surprise that this summer was one of the hottest the world has ever seen and, understandably, that climate change is widely viewed as the biggest international threat

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Climate Action Day, which took place on 30 November this year, saw people across the globe take matters into their own hands. This follows the recent increase in personal environmental action.

Consumers are using less plastic packaging, schools are organising walk-outs in protest, worldwide environmental movements are taking place, and investors are re-examining where the money in their pension funds and Isas is going.

Many feel that when it comes to putting their beliefs into investment practice, this means excluding certain ‘unethical’ sectors like oil or tobacco. But what does this actually mean for your potential returns?

1. You could lose your seat at the table

Owning any company’s stock gives you the right to have a say over how it is being run when there is a shareholder vote. By investing through a fund, you’re pooling your money with potentially thousands of other investors, making it impossible for a company to ignore you – something they could easily do if you weren’t an investor at all.

Take the case of massive British energy company BP – this summer it brought a vote on how its business strategy aligns with efforts to tackle climate change. This came after serious pressure from its investors such as us and HSBC.

It doesn’t have to be a large amount but keeping even the smallest exposure rather than none means we can all change these companies for the better.

2. You could miss out on the renewable leaders of the future

The fact that the world doesn’t need as much oil as before hasn’t escaped the oil companies either. BP’s annual energy forecast predicts that renewable energy will be the world’s main power source by 2040.

The most forward thinking among this sector are investing millions into the development of renewable energy so that they will still have a place in the future – from ‘big oil’ to ‘big energy’.

The case for such a radical strategic rethink for all these companies is growing and excluding the sector entirely might mean inadvertently cutting off the supply of investment into the renewable solution.

3. You could be more exposed to the banks and tech leaders

Investing in a traditional index fund tracker – one that follows a basket of stocks like the S&P 500 or the FTSE 250 – means that more of your money is invested in the biggest companies. In the mainstream index funds, these are most likely to be tech companies such as Apple and Microsoft, or financial companies like Barclays and HSBC.

When you take money out of oil and gas companies, it gets reallocated on that basis with the money largely going to the financial and technology companies. This could be good news when markets are strong as these sectors are among the best performing over recent years.

But as always, past performance is not a guide to the future. Concentrating even further in financial and technology companies poses the risk of bigger loss should anything go wrong for these sectors.

Does this mean all exclusions are bad?

Ultimately, to exclude or not exclude is up to the beliefs of the investor. For instance, a healthcare charity might never want its money going to tobacco companies, no matter what returns that sector might deliver.

It’s all about making a more informed decision about the reasons for exclusion and what that might mean for your investment returns and the associated risks.

Janine Menasakanian is head of distribution strategy, personal investing at Legal & General Investment Management

Please remember the value of your investment and any income from it may fall as well as rise and is not guaranteed. You may get back less than you invest. The views expressed in this article are the opinion of Legal & General Investment Management and do not necessarily reflect the editorial views of Moneywise, or constitute financial advice.