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Ethical investment remains a work in progress

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The flurry of activity around Good Money Week this year feels more than justified. Launched in 2005, this annual initiative — which starts on Saturday — aims to help people understand the benefits of sustainable and ethical finance, whether in pensions, investments or savings. And 15 years on, Covid-19 is providing new motivation for investors to explore investing in ethical funds.

The hard months of lockdown have made us focus on what really matters. For some, climate change is the spur to action, as evidence of its effects continues to pile up regardless of the pandemic. For others, social issues are at the top of their minds. The Black Lives Matter campaign gained huge global momentum this year, slave trader statues were pulled down, and this week even that most traditional of institutions, the Royal Mint, joined in, launching the UK’s first coin to celebrate diversity.

While aligning profits to principles is now the hottest investment trend, it’s a myth that this movement is just for the young and “woke”.

Assets in ethical propositions held by customers of Interactive Investor, the investment platform, have increased significantly over the past four years, and Baby Boomers are leading the charge over younger adults. The generation born after the second world war moved from holding 0.47 per cent of assets in ethical funds or investment trusts at the end of 2015 to 5 per cent (as at April 27 2020), outstripping millennials, whose holdings rose from 0.88 per cent to 4.35 per cent over the same period.

This could suggest that older generations are concerned about not just passing on wealth but passing on a healthier planet. The dramatic increase in ethical exposure could be down to a combination of factors: more availability, increased awareness and long-term performance.


There is a growing body of evidence that suggests companies with good environmental, social and governance (ESG) practices should be expected to outperform their less ethical counterparts, especially as interest in sustainability and the environment grows.

A study by Moneyfacts found that ethical funds available to UK investors have proved particularly resilient during the coronavirus pandemic, with the average ethical fund growing by upwards of 4.3 per cent over the past year compared with an average 1.5 per cent loss from non-ethical propositions.

A longer-term piece of evidence is a “study of studies” conducted by Deutsche Asset and Wealth Management with the University of Hamburg in 2015. This looked at 2,000 studies since 1970 into the impact on returns of investing along ESG lines. It found that in 62.6 per cent of studies, the use of ESG criteria had a positive impact on corporate financial performance, compared with just 10 per cent producing adverse effects. 

Profits with principles have become a reality. At the same time, ethical investing in the 2020s has come a long way from the handful of ethical investment funds developed in the 1980s that simply avoided the “sin stocks” involved in traditionally unethical activities such as gambling, alcohol or weapons.

The Investment Association, which represents the funds industry, says more than a quarter of the UK’s assets under management are invested using a socially responsible strategy of some kind. Recognising that there is an oppressive amount of jargon around, last year it introduced some definitions in responsible investment to help fund managers create a common language that their customers will understand. This fell short of the simplification that’s needed to aid understanding.

It’s still too difficult for would-be ethical investors to navigate the alphabet soup of ESG criteria, socially responsible investing (SRI), impact and sustainable investing, which all have different nuances, alongside traditional negative screening strategies.

And, before you choose a fund, investment trust or ETF, you need to be clear about what matters to you. One person’s ethical stock is another person’s sin stock, and this applies to fund managers and index providers too.

Boohoo’s prominence in ESG funds was due partly to the high scores the UK fashion retailer was given by ratings providers. But fast fashion is cheap and disposable — two things that scarcely fit with being sustainable. You might also be surprised by the regularity with which certain oil and gas companies appear in ethical and ESG portfolios. But while oil is a long way away from what many would define as ethical, many such companies are investing heavily in clean energy.

The Good Money Week campaign recommends that investors who are not sure about what matters to them look for inspiration to the United Nations’ sustainable development goals. But there’s too much for the average investor to digest here: 17 sustainable development goals on issues from ending poverty and hunger, to clean water and energy, decent workplaces and reduced inequalities, climate action and peace and justice.

Even when you are clear on your investment criteria, there’s the huge challenge of finding a fund to match. Across open-ended funds, investment trusts and exchange traded funds, there are about 5,000 collective investment options, but little help for investors on which of them should be considered as ESG funds. 

Interactive Investor has identified 140 socially responsible and environmental funds, investment trusts and exchange traded funds. It’s still a small and immature market. However, every year more funds are launched as the sector gathers momentum.

In a poll by Interactive Investor of 21 sustainable asset managers, most said ESG considerations will, in time, be integrated into all investment decisions. Two-fifths believe this will happen in the next five years.

Moral Money

For news and analysis about the fast-expanding world of socially responsible business, sustainable finance, impact investing, environmental, social and governance trends, visit FT.com/moral-money

However, greenwashing, where firms market products and investments to appear more sustainable and ethical than they really are, is a phenomenon of growing concern. Last year the Financial Conduct Authority promised to challenge companies it deems to be “greenwashing” products as it moves to protect consumers from being misled over the sustainability of their investments. So investors must tread carefully and we need to see those challenges made urgently.

Interactive Investor groups recommended ethical investments into just three categories: avoid, consider and embrace (ACE). The first includes funds that avoid companies and sectors which don’t meet their criteria; the second that consider a range of ESG issues or themes; lastly those that embrace companies active in delivering positive social or environmental outcomes.

If you do want more detail, Fund EcoMarket (FEM), run by SRI Services, is another great resource that zeroes in on the core issues and approach of the fund manager. Investors can also check out Morningstar’s Sustainable Fund Type and carbon score for funds. Fundsmith Sustainable Equity, which is on our rated ethical investment list, has a carbon score of just 2.77 per cent — anything below 10 is considered climate-friendly.

The simplest place for most people to start could be Good Money Week’s core recommendation to ask your employer for an ethical or sustainable workplace pension. This underlines the gap highlighted by the Make My Money Matter campaign, launched this year by film director Richard Curtis, which aims to increase the transparency of how pensions savings are invested.

But there’s also an ethical education gap to fill. Interactive Investor’s Great British Retirement Survey of more than 12,000 people revealed that more than half of us have no idea if our retirement nest egg is invested in a way that aligns with our moral values, let alone a good carbon footprint. Mr Curtis, could it be time for Pensions Actually, starring Greta Thunberg, David Attenborough, and the newly-styled political activist Hugh Grant?

Moira O’Neill is head of personal finance at Interactive Investor and a former winner of the Wincott Personal Finance Journalist of the Year award. @MoiraONeill





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Why it might be good for China if foreign investors are wary

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Chinese economy updates

The writer is a finance professor at Peking University and a senior fellow at the Carnegie-Tsinghua Center for Global Policy

The chaos in Chinese stock markets last week was exacerbated by foreign investors selling Chinese shares, leaving Beijing’s regulators scrambling to regain their confidence while they tried to stabilise domestic markets. But if foreign funds become more cautious about investing in Chinese stocks, this may in fact be a good thing for China.

In the past two years, inflows into China have soared by more than $30bn a month. This is partly because of a $10bn-a-month increase in the country’s monthly trade surplus and a $20bn-a-month rise in financial inflows. The trend is expected to continue. Although Beijing has an excess of domestic savings, it has opened up its financial markets in recent years to unfettered foreign inflows. This is mainly to gain international prestige for those markets and to promote global use of the renminbi.

But there is a price for this prestige. As long as it refuses to reimpose capital controls — something that would undermine many years of gradual opening up — Beijing can only adjust to these inflows in three ways. Each brings its own cost that is magnified as foreign inflows increase.

One way is to allow rising foreign demand for the renminbi to push up its value. The problem, of course, is that this would undermine China’s export sector and would encourage further inflows, which would in turn push China’s huge trade surplus into deficit. If this happened, China would have to reduce the total amount of stuff it produces (and so reduce gross domestic product growth).

The second way is for China to intervene to stabilise the renminbi’s value. During the past four years China’s currency intervention has occurred not directly through the People’s Bank of China but indirectly through the state banks. They have accumulated more than $1tn of net foreign assets, mostly in the past two years.

Huge currency intervention, however, is incompatible with domestic monetary control because China must create the renminbi with which it purchases foreign currency. The consequence, as the PBoC has already warned several times this year, would be a too-rapid expansion of domestic credit and the worsening of domestic asset bubbles. 

Many readers will recognise that these are simply versions of the central bank trilemma: if China wants open capital markets, it must give up control either of the currency or of the domestic money supply. There is, however, a third way Beijing can react to these inflows, and that is by encouraging Chinese to invest more abroad, so that net inflows are reduced by higher outflows.

And this is exactly what the regulators have been trying to do. Since October of last year they have implemented a series of policies to encourage Chinese to invest more abroad, not just institutional investors and businesses but also households.

But even if these policies were successful (and so far they haven’t been), this would bring its own set of risks. In this case, foreign institutional investors bringing hot money into liquid Chinese securities are balanced by various Chinese entities investing abroad in a variety of assets for a range of purposes.

This would leave China with a classic developing-country problem: a mismatched international balance sheet. This raises the risk that foreign investors in China could suddenly exit at a time when Chinese investors are unwilling — or unable — to repatriate their foreign investments quickly enough. We’ve seen this many times before: a rickety financial system held together by the moral hazard of state support is forced to adjust to a surge in hot-money inflows, but cannot adjust quickly enough when these turn into outflows.

As long as Beijing wants to maintain open capital markets, it can only respond to inflows with some combination of the three: a disruptive appreciation in the currency, a too-rapid rise in domestic money and credit, or a risky international balance sheet. There are no other options.

That is why the current stock market turmoil may be a blessing in disguise. To the extent that it makes foreign investors more cautious about rushing into Chinese securities, it will reduce foreign hot-money inflows and so relieve pressure on the financial authorities to choose among these three bad options.

Until it substantially cleans up and transforms its financial system, in other words, China’s regulators should be more worried by too much foreign buying of its stocks and bonds than by too little.



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Square to acquire Afterpay for $29bn as ‘buy now, pay later’ booms

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Square Inc updates

Payments company Square has reached a deal to acquire Australian “buy now, pay later” provider Afterpay in a $29bn all-stock transaction that would be the largest takeover in Australian history.

Square, whose chief executive Jack Dorsey is also Twitter’s CEO, is offering Afterpay shareholders 0.375 shares of Square stock for every share they own — a 30 per cent premium based on the most recent closing prices for both companies.

Melbourne-based Afterpay allows retailers to offer customers the option of paying for products in four instalments without interest if the payments are made on time.

The deal’s size would exceed the record set by Unibail-Rodamco’s takeover of shopping centre group Westfield at an enterprise value of $24.7bn in 2017.

The transaction, which was announced in a joint statement from the companies on Monday, is expected to be completed in the first quarter of 2022.

Afterpay said its 16m users regard the service as a more responsible way to borrow than using a credit card. Merchants pay Afterpay a fixed fee, plus a percentage of each order.

The deal underscored the huge appetite for buy now, pay later providers, which have boomed during the coronavirus pandemic.

“Square and Afterpay have a shared purpose,” said Dorsey. “We built our business to make the financial system more fair, accessible, and inclusive, and Afterpay has built a trusted brand aligned with those principles.”

Adoption of buy now, pay later services had tripled by early this year compared with pre-pandemic volumes, according to data from Adobe Analytics, and were particularly popular with younger consumers.

Rivalling Afterpay is Sweden’s Klarna, which doubled its valuation in three months to $45.6bn, after receiving investment from SoftBank’s Vision Fund 2 in June. PayPal offers its own service, Pay in 4, while it was reported last month that Apple was looking to partner with Goldman Sachs to offer buy now, pay later facilities to Apple Pay users.

Steven Ng, a portfolio manager at Afterpay investor Ophir Asset Management, said the deal validated the buy, now pay later business model and could be the catalyst for mergers activity in the sector. “Given the tie-up with Square, it could kick off a round of consolidation with other payment providers where buy now, pay later becomes another payment method offered to their customers,” he said.

Over the past two years Afterpay has expanded rapidly in the US and Europe, which now account for more than three-quarters of its 16.3m active customers and a third of merchants on its platform. Afterpay said its services are used by more than 100,000 merchants across the US, Australia, Canada and New Zealand as well as in the UK, France, Italy and Spain, where it is known as Clearpay.

Square intends to offer the facility to its merchants and users of its Cash App, a fast money transfer service popular with small businesses and a competitor to PayPal’s Venmo.

“It’s an expensive purchase, but the buy now, pay later market is growing very rapidly and it makes a lot of sense for Square to have a solid stake in it,” said retail analyst Neil Saunders.

“For some, especially younger generations, buy now, pay later is a favoured form of credit. Afterpay has already had some success with its US expansion, but Square will be able to accelerate that by integrating it into its platforms and payment infrastructure — that’s probably one of the justifications for the relatively toppy price tag of the deal.”

Square handled $42.8bn in payments in the second quarter, with Cash App transactions making up about 10 per cent, according to figures released on Sunday. The company posted a $204m profit on revenues of $4.7bn.

Once the acquisition is completed, Afterpay shareholders will own about 18.5 per cent of Square, the companies said. The deal has been approved by both companies’ boards of directors but will also need to be backed by Afterpay shareholders.

As part of the deal, Square will establish a secondary listing on the Australian Securities Exchange to provide Afterpay shareholders with an option to receive Square shares listed on the New York Stock Exchange or the ASX. Square may elect to pay 1 per cent of the purchase price in cash.

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Biden puts workers ahead of consumers

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US economy updates

For the past 40 years in America, competition policy has revolved around the consumer. This is in part the legacy of legal scholar Robert Bork, whose 1978 book The Antitrust Paradox held that the major goal of antitrust policy should be to promote “business efficiency”, which from the 1980s onwards came to be measured in consumer prices. These were considered the fundamental measure of consumer wellbeing, which was in turn the centre of economic wellbeing.

But things are changing. A White House executive order on competition policy, signed last month, contains some 72 discreet measures designed to stamp out anti-competitive practices across nearly every part of the US economy. But it isn’t about low prices as much as it is about higher wages.

Like the Reagan-Thatcher revolution, which took power from unions and unleashed markets and corporations, Biden’s executive order may well be remembered as a major economic turning point — this time, away from neoliberalism with its focus on consumers, and towards workers as the primary interest group in the US economy.

In some ways, this matters more than the details of particular parts of the order. Many commentators have suggested that these measures, on their own, won’t achieve much. But executive orders aren’t necessarily about the details — they are about the direction of a government. And this one takes us completely away from the Bork era by focusing on the connection between market power and wages, which no president over the past century has acknowledged so explicitly.

“When there are only a few employers in town, workers have less opportunity to bargain for a higher wage,” Biden said in his announcement of the order. It noted that, in more than 75 per cent of US industries, a smaller number of large companies now control more business than they did 20 years ago.

His solutions include everything from cutting burdensome licensing requirements across half the private sector to banning and/or limiting non-compete agreements. Firms in many industries have used such agreements to hinder top employees from working for competitors, as well as to make it tougher for employees to share wage and benefit information with each other — something that Silicon Valley has done in nefarious ways.  

This gets to the heart of the American myth that employees and employers stand on an equal footing, a falsehood that is reflected in such Orwellian labour market terms as the “right to work”. In the US this refers not to any sort of workplace equality, but rather to the ability of certain states to prevent unions from representing all workers in a given company.

But beyond the explicitly labour-related measures, the president’s order also gets to the bigger connection between not just monopoly power and prices, but corporate concentration and the labour share.

As economist Jan Eeckhout lays out in his new book The Profit Paradox, rapid technological change since the 1980s has improved business efficiency and dramatically increased corporate profitability. But it has also led to an increase in market power that is detrimental for people in work.

As his research shows, firms in the 1980s made average profits that were a tenth of payroll costs. By the mid 2000s that ratio had jumped to 30 per cent and it went as high as 43 per cent in 2012. Meanwhile, “mark-ups” in profit margins due to market power have also risen dramatically (though it can be difficult to see this in parts of the digital economy that run not on dollars but on barter transactions of personal data).

While technology can ultimately lower prices and thus benefit everyone, this “only works well if markets are competitive. That is the profit paradox,” says Eeckhout. He argues that when firms have market power, they can keep out competitors that might offer better products and services. They can also pay workers less than they can afford to, since there are fewer and fewer employers doing the hiring.

The latter issue is called monopsony power, and it is something that the White House is paying particularly close attention to.

“What’s happening to workers with the rise in [corporate] concentration, and what that means in an era without as much union power, is something that I think we need to hear more about,” says Heather Boushey, a member of the president’s Council of Economic Advisors, who spoke to the Financial Times recently about how the White House sees the country’s economic challenges. 

The key challenge, according to the Biden administration, is that of shifting the balance of power between capital and labour. This accounts for the emerging ideas on how to tackle competition policy. There are many who regard the move away from consumer interests as the focus of antitrust policy as dangerously socialist — a reflection of the Marxian contention that demand shortages are inevitable when the power of labour falls.

But one might equally look at the approach as a return to the origins of modern capitalism. As Adam Smith observed two centuries ago, “Labour was the first price, the original purchase-money that was paid for all things. It was not by gold or by silver, but by labour, that all wealth of the world was originally purchased.” Reprioritising it is a good thing.

rana.foroohar@ft.com



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