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December 10, 2012
FairPensions Calls on UK Ethical Funds to Adopt Positive Screening and Increase Corporate Engagement
by Robert Kropp
A survey of nineteen UK-based ethical funds finds that most continue to rely on negative screening
of sin stocks, and few have committed to shareowner engagement with corporations.
Much of the recent literature on sustainable investment highlights the potential long-term
investment advantages of positive screening, the practice of selecting portfolio components
according to a company's environmental, social, and corporate governance (ESG) performance. Coupled
with proactive shareowner engagement, positive screening can help effect the transition to a
low-carbon economy and contribute to improved social justice as well.
however, most funds that are classified as sustainable or responsible—or ethical, as the UK-based
FairPensions describes them in a recent
survey—continue to focus on negative screening of so-called sin stocks as the basis of their
investment strategy. While US
SIF: The Forum for Sustainable and Responsible Investment found in its most recent Trends
Report that the emphasis on sin stocks such as alcohol and tobacco has declined among sustainable
investors, negative screening continues to be the predominant ESG incorporation strategy.
And in its recently published survey of UK-based ethical funds, FairPensions also noted a continuing
reliance on negative screening of sin stocks, "despite the fact that human rights and environmental
protection now feature much more prominently in most surveys of people's ethical priorities."
"Too much of the industry appears to be characterized by the unthinking application of a
traditional screening approach to an outdated set of ethical priorities," the report states.
Many of the 19 ethical fund providers surveyed could benefit from improved transparency,
FairPensions found. While almost all of them publish some information about their investment
criteria, "nearly half do not publish the fund's full holdings." And only about half of the
policies of the funds address environmental and social issues as well as corporate governance.
Furthermore, only three of the funds surveyed actively seek out the opinions of their
customers. "Savers choosing ethical products will want to know that their voice is being heard and
their money is managed in a way which reflects their values," Christine Berry of FairPensions said.
"Our findings suggest that the ethical investment industry should be doing a lot more to ensure it
stays relevant to the issues that matter to its customers."
FairPensions has been a
pioneer in championing shareowner engagement in the UK, where the practice of submitting shareowner
resolutions is still relatively uncommon compared to the US. Last year, the organization published
a Guide to Shareholder Resolutions in the UK, in an effort to provide
nongovernmental organizations (NGOs) and institutional investors with opportunities to influence
Thus far, the uptake by ethical funds of FairPensions'
recommendations on corporate engagement is lagging, the survey found. "Only five fund providers
display a strong commitment to ethical engagement," while nearly 60% do not practice engagement at
all. Disclosure of voting and engagement activity is lacking as well. Forty percent do not disclose
engagement records at all, only seven providers disclose full lists of all votes, and only two—F&C
Investments and Scottish Widows—"give explanations for all contentious voting decisions."
Five of the 19 funds surveyed performed well across all areas. In addition to F&C Investments,
they include Standard Life, WHEB Asset Management, The Co-operative Investments, and Jupiter Asset
"We urge the rest of the industry to learn from these leaders," the report
concludes, "asking themselves why their customers choose to invest ethically, what issues they care
about and whether engagement might have a part to play in meeting their expectations."
"The ethical investment industry can and should be leading the way in improving corporate
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