A new investment fund focuses on businesses with diverse and inclusive workforces. But does that make them perform better, or even ethical?
When people talk about ethical investing, generally they mean putting their money into firms that are engaged in sustainable, worthy industries. In other words, avoiding investing in firms that are involved in arms, gambling, tobacco and the like.
But one new fund is offering investors the chance to support businesses that “promote diversity and inclusion practices”.
The iShares Thomson Reuters Inclusion & Diversity UCITS ETF (catchy name, I know) tracks an index put together by Thomson Reuters which ranks more than 2,000 publicly traded firms across the world. It
Rachel Lord, head of EMEA at BlackRock, said that diverse firms make better decisions, and that’s ultimately good news for investors. She continued: “We are launching this fund at a time when a spotlight is firmly on companies to show what they are doing to improve the diversity of their workforce, and as investors demand new funds to express specific preferences within their portfolios.”
The iShares fund launch comes a few months after Legal & General launched its 'GIRL' fund, which invests in companies with greater gender diversity.
Ethics and investing
Recent research suggests that ethical considerations are becoming more important for investors when determining where to put their money, particularly among younger people.
For example, a study by Rathbone Investment Management earlier this year found that more than a quarter of millennials would take their investment out of firms facing allegations of misconduct or unethical behaviour, even if it was achieving high returns, compared to just 9% of investors aged 55-64.
The survey found that similar numbers rated invested in managed funds that are ethically screened as the best way their money could be used for positive impact, with a quarter of young people supporting that suggestion compared to less than one in ten investors aged 55-64.
Why it's too difficult to invest your money ethically, and how to get started
Will investing ethically lose me money?
The criticism of ethical funds has generally been that they don’t deliver great results. But that may not be entirely true.
Of the many equity funds that are classed as ethical by fund research Lipper, 12 have performance data for the past five years. It’s worth noting that over one year, three years and five these ethical funds come out top over the average performance of all UK equity companies.
Over one and five years they also outperformed the FTSE All-Share Index.
This is supported by research from financial information site Moneyfacts last night, which tracked the performance of ethical funds against conventional non-ethical funds over a range of investment periods. It found that in 13 of the 20 scenarios surveyed, the ethical funds came out on top.
Diverse isn’t the same as ethical
But it’s important to accept that having a diverse workforce, while welcome from a moral point of view, doesn’t actually mean that the firm conducts itself in an ethical way.
That’s clear when you take a look at the names of the businesses appearing in iShares' fund. For example, there’s Samsung, which is actually being sued because of allegations of child labour and other human rights violations, while Sony, another member of the index, has faced similar claims in the past.
And then there is Coca Cola. Last year a Channel 4 documentary found that Coca Cola had been trying to get round the sugar tax, while it has also been explicitly targeted by Greenpeace because of its non-environmentally friendly packaging.
Let’s be honest, when you think of an obviously ethical business, Coca Cola isn’t exactly the first name that comes to mind.
That said, some of the other firms in the fund have a well-earned reputation for being ethical, like L’Oreal and Nestle.
You can read the fund's methodology for investing in businesses yourself here
A step in the right direction
I’m very much in favour of people taking more notice of how ethically the firms they invest in are behaving, so anything that improves the information available to investors is welcome.
But I’ll always put more weight into the actions of that business, rather than the make-up of its workforce. Diversity may be an indication that it a business is ethical, but ultimately we should judge it by its actions, not what its employees look like.