Holden & Partners analysis suggest that 'ethical screens' do not necessarily impact on performance

Over the last five years Holden & Partners have worked with a charity client who have strict ethical screens, including animal testing, intensive farming, tobacco and human rights (among others). These ethical screens have the impact of excluding virtually half of the UK stock market. One of the main concerns for the charity trustees has been the long term impact on performance that such a screen would have and monitoring the impact has been an important part of Holden & Partners work.  

Ethical Screen Analysis

For more than five years, each quarter (using market cap data provided by the London Stock Exchange) Holden & Partners have screened the top 300 stocks listed in the UK and monitored the capital value of this screened universe against the FTSE All Share.

Ethical Performance

The chart below is a graphical representation of Holden & Partners analysis and shows that an ‘ethically screened’ universe of stocks has moved in line with the general market over the last five years. At times it has outperformed and at times it has underperformed.

From the chart you can see that the last quarter was not a good month for the Ethical Benchmark, but at 30^th September 2011 the FTSE All Share and the Ethical Benchmark could not be told apart.

What conclusions can be drawn about ethical fund management?

Holden & Partners have not measured in this analysis the impact of income on the total returns, they have simply measured capital values and income does play an important part in total returns. Further work is needed in this area on the impact the exclusions might have on income.

What the chart above does shows very clearly is that the ‘Ethically Screened’ universe suffered during the financial crisis more than the FTSE All Share. This is no surprise and a situation Holden & Partners had highlighted as a big risk to ethical funds in their Guide to Climate Change and Ethical Investing in 2007. At times in the 'ethically screened' universe the banking sector represented over 30% of the ‘Ethically Screened’ UK index.

From this analysis it does not seem unreasonable to conclude that from a capital perspective an active manager in the UK market can perform in line with the broader market, even with an ethical screen which excludes almost half of the market.