Ethical Structured Products?

Joshua Wynn, Lowes Financial Management

I recently received an enquiry. The caller was a financial professional who had been hit with a question from one of his own clients; he had introduced the possibility of integrating some structured investments into the client’s portfolio, when she had asked him about the ‘ethical options’ available when it came to these investments. The chap was rather stumped – he hadn’t considered it before, but in the growing world of conscience-investments, where funds which specialise in human trafficking and encouraging babies to vape are very much out of vogue, where did structured products fit in? Were there any plans linked to the FTSE4Good, for example?

Despite the wry tone I have perhaps adopted so far in this article, I was genuinely thrown by this query – where were all the ethical structured products? Could this be an untapped market? The Millennial Chorus begin a motet in my ears. Alas, I had at that time no reassuring answer to give to the adviser waiting on the other end of the phone. I apologised, he thanked me for my time and we parted telephonic company. However, since that time I have time given the matter some thought and – returning now like the inhabitant of Plato’s cave who saw the light of the sun – have come to explain away the shadows on the wall.

Ms. B (an alias) had reservations about structured products because she surmised that their link to the FTSE 100 Index (in her case) would result in an indirect investment in companies which did not represent her scruples. If this were the case, fair enough, it’s her money. But the first flaw in this argument is that every penny Ms. B spends – be it via investment, tax or just buying a pint of milk from one of the many grocery conglomerates who are slowly bleeding the dairy industry dry with their relentless insistence that four pints of milk should be £1 – every penny will pass through ‘unethical’ hands sooner or later. Should Ms. B invest in wind farms, that company will itself have its own investment portfolio into which her capital will be pooled, and she will have no control if their investment managers decide that sweatshops in Bangalore are due a resurgence. Similarly, the capital gains tax on her investments’ eventual maturity go to a Treasury which also profits on supplying arms to Saudi Arabia. And so we have entered the world of dysfunctional philosophy – the sort that befuddles all and helps none.

But wait, out of the darkness of cynical consequentialism comes a great light: structured products are not investments into the shares or indices to which they are linked. To use an analogy, structured products are like sailing ships (stay with me) and their linked indices are like the wind; if the index/wind heads in the right direction, the product/ship gets where it needs to go, but they have negligible impact on the force directing them. The performance of structured products is determined by how the underlying index performs, but the only investment is with the counterparty bank. Again, whilst the counterparty holds Ms. B’s capital they can choose to allocate or relend it wherever they like – that is the basis of our economic system, but would you stop buying bread because Loaf Group included deep sea oil exploration companies in its portfolio? Probably not, although the apparent evils of gluten may lead you to abandon wheat regardless. I suppose it’s food for thought.