Ethical Investing

560 315 Eleonore Bylo

By Kim Holding, Portfolio Manager

The world of ethical, responsible and sustainable investing is very fast moving and becoming increasingly complex. Not a day seems to go by without a new regulation or piece of legislation being proposed or enacted, to further promote sustainable practices, and hold businesses accountable for their impact on the environment and society.

How, then, can investors successfully navigate the landscape, and make sense of the information overload?

At Ellis Bates, our Investment Team has been managing Socially Responsible Investing (SRI) portfolios since 2008, demonstrating our deep roots in this area. To keep up to date with developments and filter out funds most worthy of our clients’ investment and trust, our investment process has naturally evolved over the years, more recently with the development of our SRI Framework. This Framework is a highly detailed tool that allows us to carry out an in-depth analysis on many factors including a fund’s alignment with the latest standards, investment philosophy, experience of the management team and engagement policies, to ensure the fund really is as ‘good’ as it says it is. As a living, breathing document, the Framework has undergone many developments and refinements since its implementation, and further revisions will be necessary as the landscape continues to evolve.

Utilising our Framework has allowed us to pinpoint several funds requiring further assessment. The most effective approach to clarify this information is to engage in discussions with the management teams – our well-established relationships with these teams significantly improves our access to valuable insights, enables constructive dialogues, and keeps us informed about their strategies and decision-making processes.

By way of illustration: this summer, our Framework brought attention to a fund in our SRI portfolios that exhibited notable exposure to UK water companies. Investors are no doubt aware that these companies have faced scrutiny in recent months due to their involvement in polluting rivers with sewage, and we recognise that addressing such negative environmental impacts is of utmost importance.

From our interactions with the fund’s management team, we established their beliefs and perspectives: a combination of events including outdated infrastructure (much of which dates to the Victorian era) and population growth (thus putting increased demand on this infrastructure) have contributed to these events. This can raise questions among observers as to why infrastructure dates back several decades, when investment in the industry has doubled since privatisation in 1989[1].

One area of criticism is that directors have allowed larger pay-outs to investors than on infrastructure investment. In economics, capitalism and socialism are opposing schools of thought: when capitalism is left unchecked, this can lead to inequalities and social injustices stemming from firms’ pursuit of profit. On the other hand, an anti-profit culture can result in a lack of dynamism in an economy, while failure by directors to make investor payments could violate their legal obligations under the Companies Act (which says, among other things, that they must act in shareholders’ best interests).

When capitalism or socialism is taken to an extreme, from an economic perspective, it can become necessary to restore balance. Indeed, water companies, regulators and government are responding positively to feedback from the Industry and Regulators Committee[2] who, following an investigation, have recommended measures to tackle these concerns. One example is providing new powers to regulator Ofwat, to closely monitor investment by the industry, and to hold firms to account[3].

Meanwhile, the fund’s management team is engaging with water companies to issue ‘use of proceeds’ blue bonds, where money raised is dedicated to specific projects such as upgrading infrastructure. The team – and we – continue to monitor the situation regarding pollution, while holding what they consider to be the most impactful names within the water sector, all of which should improve water security, and deliver better environmental and social outcomes.

We are reassured by the amount of time and research that the team has clearly dedicated to understanding this issue. Further, they have experience of engaging with companies on Environmental, Social and Governance (ESG) matters, thus fostering positive change and promoting sustainability.

Is it time to build a more ethical portfolio?

As awareness and interest in ESG factors continue to grow, the trend towards responsible investing will only strengthen. Starting a portfolio and filling it with environmentally, socially and governance-minded investments doesn’t need to be difficult. To find out more, please speak to us today.

[1] Ofwat, March 2022. Investment in the water industry. Retrieved from (Accessed: August 2023)
[2] UK Parliament, March 2023. Failures of regulators, water companies and Government leaving public and environment in the mire. Retrieved from (Accessed: August 2023)
[3] GOV.UK, March 2023. Government supports new Ofwat powers to tackle water company dividends. Retrieved from (Accessed: August 2023)

Stay up to date - subscribe to this Financial Advice hub

Read our privacy policy for more info.