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Ethical Investment


Ethical investment has been one of the fastest developing niche areas and trends in the financial industry in the last decade. A growing number of people prefer to avoid investing in industries and companies which they consider harmful to the world or otherwise incompatible with their values. Alcohol, gambling, weapons, animal testing and nuclear energy are common examples of sectors excluded by ethical funds.

While some ethical investors avoid these industries completely, others merely restrict their share in their portfolios to a certain small percentage (such as 5%). Furthermore, there is no universally valid list of unethical industries – what one person considers unethical and inappropriate may be totally acceptable to another.

Effects of Ethical Investing on Risk and Return

The obvious practical implication of being an ethical investor is narrower universe of funds or securities to potentially invest in. As a result of voluntarily adding another set of criteria (i.e. ethics) besides risk and return to portfolio construction process, it is likely that risk-adjusted performance will be slightly worse than in case of an ethically unconstrained portfolio. In order words, return will be lower for the same level of risk or risk will be higher for the same level of return. Moreover, ethical funds and plans may incur higher costs due to increased complexity of the investment management process. It is essential that the investor understands and accepts this before implementing an ethical investment strategy.

Holborn Assets UK Ethical Investment Services

We understand the preference of some clients to invest ethically and at the same time achieve the best possible risk-return performance while keeping costs reasonable. For these clients Holborn Assets UK has developed a core set of portfolios based on the strictest ethical criteria. Selection of these portfolios is still in line with our general, evidence based investment approach (as far as reasonably possible).

For clients willing to accept that, a degree of hybridisation between the ethical and non-ethical portfolios may lead to better risk-adjusted performance, while still taking the ethical factor into consideration (in other words, getting the best of both worlds). As this may breach the ethical requirements of some clients who prefer a stricter ethical approach, three sets of model portfolios are offered:

  • Full (non-ethically screened)
  • Pure Ethical
  • Hybrid Ethical

Standardisation of ethical portfolios enables us to offer a cost-effective service. As an alternative, a more bespoke approach is available to clients who require that and are ready to accept a higher level of charges, which are needed to cover the increased workload and time spent with the individual client on advice, execution and ongoing reviews.

Holborn Assets UK Investment Approach and Risk/Return Implications

With ethical investments, we try to stick to the core principles of our general investment approach as much as possible. The high level split between asset classes – equities, bonds and cash – still applies. Both the non-ethical and ethical portfolios also maintain a UK bias.

As a result, both types of portfolios should have similar variance. Key difference with ethical portfolios is the application of ethical screening (the screening process is explained in more detail later on this page), which leads to a narrower range of available funds and has several implications.

Firstly, while we normally prefer passively managed funds with our general (non-ethically screened) portfolios, majority of the ethically suitable funds are, at least officially, actively managed (the fund managers make discretionary decisions about stock selection and market timing). Therefore, fund manager error, which can have positive or negative effect in individual cases, will affect performance of the ethical portfolios, unlike the non-ethically screened ones.

Secondly, the range of available ethical funds is extremely limited for some asset types which we normally include in our non-ethically screened portfolios, based on their favourable risk-return characteristics, which have also been confirmed by numerous academic research papers. This concerns particularly value equity funds, small company equity funds and short-term bond funds. It has different effects on volatility and risk (measured as standard deviation of returns) of the equity and fixed income portions of the portfolios. The equity portions show similar volatility for the main and the ethical portfolios. On the contrary, the fixed income portion of the ethical portfolios shows higher volatility than the fixed income portion of the general portfolios (mainly due to longer average maturity of bonds). As a result, lower risk ethical portfolios, which tend to have higher weight of fixed income and lower weight of equities, will have slightly more risk than similar non-ethically screened portfolios. This effect will be much smaller in more equity oriented portfolios.

Ethical Screening Criteria

Screening funds for our ethical portfolios occurs in two steps. Funds are first filtered by reference to the ethical standards and then by their investment characteristics, such as asset type and risk. This section explains the first step.

When selecting industries, activities and companies to invest in, funds typically apply positive (invest in good things) and negative (do not invest in bad things) criteria. Out of the two, negative criteria tend to make greater difference, as individual funds vary both in the extent to which they apply them and in the particular rules. Therefore, Holborn Assets UK focuses on the negative criteria in its ethical screening.

Partially negative criteria are used by some funds, i.e. they put restrictions on the weights of undesirable industries or activities rather than eliminating them entirely. In such case, when there are other funds in the same sector which fully apply the negative standard (complete elimination), our screening process will give preference to the stricter funds.

The selection of filters and their severity has inevitably taken into account the fact that excessively strict criteria could result in the removal of all candidate funds from the shortlist. In order to avoid this, where necessary, a pragmatic approach, which sticks as far as possible to the ethical intent of the process, has been adopted.

The ethical criteria have been summarised below:

Alcohol – Production
Exclude if possible but not essential

Alcohol – Sale
Exclude if possible but not essential

Animal Intensive Farming – Retail

Animal Intensive Farming – Wholesale

Animal Testing – Cosmetics and Toiletries

Animal Testing – Pharmaceuticals

Environmental Abuse

Financial Services
Don’t exclude

Exclude if possible but not essential

Human Rights Abuse


Nuclear Energy


Exclude if possible but partial acceptable

Investment Screening Criteria

This part explains the second of the above mentioned steps – screening by investment characteristics such as risk, return and costs. The starting point for this step is having a shortlist of ethically screened funds.

The selection of criteria reflects our general investment philosophy, particularly our preference of passively managed funds, rather than those trying to actively select stocks or time the market and predict its direction. Historical evidence and academic research have shown that the latter have been generally ineffective in the long run, especially when taking their higher costs into consideration.

The key statistic that we use is the fund’s beta, which measures the extent to which a fund tends to move relative to the market. When active management (measured by alpha) is taken out of the equation, beta is the main driver of the fund’s return and risk. Funds which tend to move with approximately the same volatility as the overall market have beta of 1. Higher beta indicates that the fund’s performance will be higher than the market’s performance when the market goes up and more negative when it goes down. Beta lower than 1 indicates that the fund will move less than the market. The higher the beta, the greater the potential impact of fund manager’s errors and the greater the risk. Therefore, wherever possible funds with beta as close to 1 will be selected. Because beta is not constant over time, it is essential to compare funds based on betas calculated consistently over the same period (we prefer to use 1, 3 and 5 years), as far as possible.

It is worth mentioning that past performance of funds or managers has deliberately not been included in our criteria. History has consistently shown that past performance has very little predictive power over future performance. In other words, the mere fact that a fund has done better than its peers does not make it more likely to outperform going forward.

Another important factor we consider is the fund’s cost – management fees and other charges. However, due to the fact that the range of ethical funds is limited and their costs tend to be higher compared to the non-ethically screened funds, investors who wish to apply ethical investment criteria will need to accept that the average level of costs will be higher and will cut into investment performance.


The Holborn Assets UK ethical portfolios have been designed to provide investors with the best of both worlds. Careful ethical screening should fulfil the needs for responsible investing in line with client’s beliefs and values. At the same time, applying our evidence based investment approach, the portfolio is constructed to maximize expected return while respecting the client’s degree of risk tolerance.


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