27 February 2011

Ethical funds need to disseminate information

Ethical funds provide insufficient information about risks and what ethical management means, a new thesis shows.

Ten years ago, only a handful of ethical funds existed in Sweden. Today there are more than a hundred, and this increase in ethical investments is expected to continue. But in practice there are major problems involved in ethical management, very much because the wording of the current information requirement is not optimal. This makes it difficult for savers to take informed decisions.

Stringent regulation Regulation of ethical funds must therefore be tightened up and information standardised to permit comparisons between different funds. This view is expressed in a new thesis by Sebastian Siegl, a researcher at the Department of Law, part of the School of Business, Economics and Law at the University of Gothenburg. He is linked to Mistra´s Sustainable Investment Research Platform (SIRP) programme.

Departing from norms
At present, there is no clear definition of what may be called an ‘ethical fund´. Funds dubbed ‘ethical´ are often those that try to consider ethical aspects in some way when they select the companies they invest in — for example, by avoiding investments in sectors like alcohol, betting, pornography, tobacco and weapons, as well as in companies that are not environmentally aware or that depart from international norms.

However, correct assessment of ethical investments calls for access to clear information for financial advisors. This is not available today, in the view of Sebastian Siegl, a researcher in commercial law at the School of Business, Economics and Law in Gothenburg.

‘At present, there´s confusion about how fund companies should report on the ethical aspects. And in some cases it´s questionable whether the people who go in for ethical fund management are ethical in relation to savers, considering that they don´t make it possible for their customers to take informed decisions,´ Siegl says.
His proposed solution to the problem is to tighten the regulation of ethical fund management; in his opinion, this is not based on how fund managers conduct themselves in practice. In Siegl´s view, information about ethical funds should be standardised to facilitate comparisons between different fund companies and to take risk levels more into account.

Maximum return
‘Another measure that may afford improvement is to divide funds into two main types: those aimed solely at maximum risk-adjusted return and those that have parallel purposes, such as attaining a socially or environmentally related objective,´ Sebastian Siegl concludes.

Thesis title

Fondförvaltaransvaret — särskilt om etisk fondförvaltning (‘Responsibility for fund management — especially ethical fund management´)

Mistra Mistra