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Part 2: A question of ethics…are ethical investment funds as ‘ethical’ as they seem?

As the world around us becomes more focused on climate change and many of us look to make more ethical choices in our day-to-day lives – your thoughts may well turn to  ‘how can I make ethical investments?’

Investors appear to be presented with more choices in terms of ethical investment options, but are they as ‘green’ as they appear at face value?

We are seeing more prominent funds positioning themselves as ‘eco-friendly’ too. Take, for example, the announcement earlier this year that Norway’s main sovereign investment fund – a massive hedge fund called the Government Pension Fund Global (GPFG) – would no longer be investing in fossil fuels, concentrating instead on investing in renewables.  The fund is widely reported to be one of the world’s largest sovereign wealth funds, managing an estimated £770 billion of Norway’s assets.

A shift towards ethical investments?

What does it mean when global portfolios take such radical strides towards being more ‘ethical?’ Is the world of finance management becoming more green? Does concentrating your efforts on funds with policies like this automatically make you an ‘ethical investor?’

Our last blog introduced ethical investment funds and what they mean. In it, we identified that while in the UK the investment market has seen an upward trend for investors wanting to be ‘socially responsible’ with their money, investment in ethical funds has seen slow and steady growth over the last few years. This is expected to continue to rise.

We also explored the ‘ethical’ spectrum, along which most companies sit. While there are different types of funds and various ways for portfolio managers to say that funds and the companies that they back are ethical, very few businesses can claim to be 100% eco-friendly.

So what’s happening in Norway?  

With large, prominent investment funds starting to turn away from investing in ‘less desirable’ sectors, does this demonstrate a huge ‘green’ shift for global finance management?

According to many mainstream media stories, the answer is ‘yes!’  Reports declared that the Norwegian wealth fund, originally created to invest in North Sea oil profits, was now divesting in fossil fuels. What a turnaround!

Or is it?!

First, let’s consider that Norway’s GPFG fund made a lot of money, prior to this, through heavily investing in the oil and gas sectors. Second, despite this announcement, the portfolio also continues to invest in companies like Shell, Exxon, Petrobras, Total and BP.

Fake News!

Forbes magazine pointed this out in March – Norway’s Massive Sovereign Wealth Fund is not divesting its energy shareholdings – examining the fund’s white paper in detail and accusing mainstream media of reporting ‘FAKE NEWS!’ 

The Guardian reported that, while the fund’s management announced that they would stop investing in fossil fuels and phase out oil exploration from portfolio activities, they would also continue to invest in certain oil and gas companies, as long as they too were investing in the renewables sector.

Why change? Is it all just a publicity stunt?

We can only speculate on why the Norwegian fund would make such a change. Why would such a large global fund go to the efforts of saying it was ‘divesting’ its interests in fossil fuels if that’s not what was happening? Were Forbes and the Guardian correct in saying that media headlines had made the story seem more ‘eco-friendly’ than it actually was?

Norges Bank, who manage the investment fund, explained in a press release that the portfolio was turning away from investing in fossil fuels as a way of protecting the economy of Norway by ensuring it wasn’t severely affected by the inevitable drop in the price of oil in the future. They did not claim that this was due to any climate concerns.

Setting out their future agenda in a white paper, the GPFG’s fund managers stated that the majority of investment in renewables over the next decade or so would come from businesses whose main source of income wasn’t renewables. While recognising climate change as an important risk factor, they reported that this wasn’t a barrier to holding stakes in fossil fuel companies.

Perhaps the fund isn’t being as ‘ethical’ in it’s choices as one might first have assumed, on the other hand, it is looking towards the future – by not concentrating it’s efforts solely on fossil fuels and investing in alternatives.

I’m interested in ethical investments – what should I do next?

As with all financial management decisions – making an ‘ethical’ one isn’t as straightforward or clear-cut as you might first think.

In our previous blog, we touched on where to start with becoming an ethical investor. This begins with thinking about what being ‘ethical’ means to you, then trying to align your values, financial aims and goals, before seeking investment opportunities that support these.

To find out more about ethical investment funds and explore the right option for you, speak to your independent financial advisor.

Carrick Financial Management is a highly experienced team of independent financial advisers based in Newcastle. We are FCA Authorized, and we promise not to bore you with our ethical financial knowledge!

If you are looking for straightforward, transparent and trustworthy advice, give us a call on 0191 217 0007 or email enquiries@carrickfinancialmanagement.net.