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Ethical investing guide 2008

A growing number of investors are putting their money in ethical companies and causes. Those offering responsible financial products are trying to communicate them in a simple way.

Internet and the involvement of experts and brokers allows any investor to earn profits on their capital while assuring that it is being used according to ethical criteria. Of course, the definition of “ethical” has as many exceptions in this context as investing products in the market.

Consolidation of the ethical finance products

Moving away from traditional European and American charity- with its deep religious and secular roots-, socially responsible investment has emerged with the new century. The main attraction of ethical financial products is the combination of “social benefit” with the search for value for the investor.

Socially responsible investing has grown in robustness since 2001. Ethical investment accounts represented 2.15 billion dollars in 2003, a fraction of the 2.01 trillion it had grown to by 2001.

In just the United States, the market for ethical investing will move 3 billion dollars in 2011, according to the financial consultancy Celent , while the European market grew from 1 trillion euros in 2005 to 1.6 trillion in 2007. Ethical investment is strong in Europe: the United Kingdom, France, Italy, Sweden and Belgium have 63.7% of the world’s SRI funds.

The change in mentality, regarding an investment category that used to be seen as marginal, is obvious. Celent researchers say socially responsible investment is becoming “more mainstream” in both Europe and the US.

And, to the extent that the investment products are being adopted by more diverse users, many of them without large fortunes, the perspectives for socially responsible investment are even more encouraging.

Neither the large institutional investor (for example, the Norwegian Fund of the Petroleum) nor the small investor, are interested in investing in practices that put the environment at risk, lack respect for human rights or promote remote wars.

Both mainstream literature (from the book Green to Gold, by Daniel C. Esty and Andrew S. Winston, to No Logo, “iconic” in spite of its author, Naomi Klein; or her latest work, The Shock Doctrine) and cinema (Blood Diamonds or The Constant Gardener are proof of it) show the growing interest in social responsibility from businesses and individuals in investing, directly or indirectly, in businesses with ethical aspects.

Double return on investment

Socially responsible investment (SRI) gives traditional financial products an essential aspect that is increasingly important to investors: it involves favoring corporate practices that account for protection of the environment and workers, quality of products, or their diversity.

Many of these investment products (although not all) explicitly avoid participation in businesses related to alcohol, tobacco, gambling, production or sale of weapons or the defense industry in general.

Financial products exist that invest in the fight against climate change; or others that invest in renewable energies; in micro-credits for families of developing countries; or in fair trade projects, to list some examples.

The managers of these funds base their selections on some norms and criteria increasingly more defined and universally endorsed, divided fundamentally into two strategies:

  • Negative Filter: screening out unacceptable businesses that do not represent fundamental ethical criteria (respect for the environment and human rights, measured by a series of indicators). The list of banned companies include not only those that harm the environment or create unjust labor conditions, but also those that produce arms, tobacco, alcohol, pornography,GMO crops, experiment with animals and other criteria, in function of the individual fund. For example, an ethical fund of religious nature would include abortion as a negative filter.
  • Positive Filter: screening for companies with superior social or environmental performance. Positive criteria include, according to Ethical Investment Research Services (EIRIS): community involvement, cooperate governance, disclosure, environmental improvement and management, equal opportunities, positive products and services and supply chain issues.

The British Association of Agents of Investment explains in depth both standards (positive and negative) and their role in investment ethics. Explanations of these criteria can be consulted in depth in the document Choosing an ethical fund, published by the center of investigation EIRIS.

Principles of ethical investment

The norms and criteria that define ethical investment aren’t taken from one single, unequivocal list of social and environmental values. Nonetheless, investors themselves have created, with the help of the UN (through the departments UNEP Finance Initiative and UN Global Compact), the Principles for Responsible Investment.

The Principles for Responsible Investment was developed by “an international group of institutional investors reflecting the increasing relevance of environmental, social and corporate governance issues to investment practices.”

The principles are voluntary and aspirational. They aren’t prescriptive, but they provide a collection of corporate, environmental, and social procedures for ethical investors. The Principles for Responsible Investment can be signed by companies and investment firms worldwide.

“Signing represents a very real commitment to the Principles, demonstrating support from the top-level leadership of the whole investment business. And applying the Principles should not only lead to better long-term financial returns but also a closer alignment between the objectives of institutional investors and those of society at large.”

The Principles for the Responsible Investment are divided into 6 sections, in which investors that subscribe commit to:

  • Incorporate environmental, social and corporate governance (ESG) issues into investment analysis and decisions (aims to create instruments and serious parameters and comparables of good business governance, as well as to encourage university research). 
  • Incorporate ESG issues into ownership policies and practices.
  • Ask the companies in which they invest to publish appropriate information on good governance and social responsibility.
  • Promote the acceptance and application of the Principles for Responsible Investment in the investment industry.
  • Collaborate to improve the efficacy in the application of the Principles.
  • Report to the other signatories on one’s activities and progress in the application of the Principles.

In summary: the lack of a regulated and recognized trademark for investors worldwide that can define terminology and methods for measuring good corporate governance, social responsibility or responsible investment, has caused the actual ethical fund managers to create, with the protection of the UN, the aforementioned Principles.

Their application will assure a greater guarantee for the ethical investment managers and, therefore, for the investors themselves. And, if we agree that ethical investment returns benefits to communities worldwide, then these Principles benefit defenders of the environment or human rights.

Ethical investment products

There exist multiple products related to ethical investment or ESR:

  • Investment funds: increasingly popular products. The sustainable criteria is not applied just to stock market investments, but also to “hedge funds”, or to venture capital funds. Consumers now recognize that “ethical fund” is also equivalent to profitability. As explained by Laura Albareda, María Rosario Balaguer and Daniel Arenas in their book Observatory 2007 of Socially Responsible Investment, several studies show that CSR funds are as profitable as their conventional equivalent. In just the United States, there are more than 200 ethical funds, which represent about 13% of all investments in the country.
  • Pension Funds: pension funds depend on their individual management which are beginning to receive social pressure to adopt policies of accountability to shareholders that are positive for communities and the environment. Various pension funds take into account the environment and avoid investments with a risk of violation of human rights. The Pension Fund of the Government of Norway, for example, has a mandate to exclude companies “where there is considered to be an unacceptable risk of contributing to: serious or systematic human rights violations, serious violations of individuals’ rights in situations of war or conflict, severe environmental damages, gross corruption and other particularly serious violations of fundamental ethical norms.” The French Reserve Fund-FRR is a similar case with objectives and criteria similar to those of the Norwegian fund.
  • Banking ethics: entities specialized in this type of banking (Triodos Bank); and banks (HSBC, ABN Amro, Santander, BBVA) and credit unions with specific products related to responsible investment (investment in businesses endorsing sustainability, ecological projects, aid projects, etc).
  • Micro-credit entities and other products: ethical investment does not only refer to modification with social and environmental criteria of classical investment products, but also to new products, derived from ideas or initiatives that allow direct investment in the financing of companies, projects or people in needy locations, in the shape of micro-credits and other related products.

Guide to ethical investment

It is possible to achieve a considerable return on investment and, at the same time, help the planet, explains Harvey Jones in the British newspaper The Guardian. The article offers 10 practical tips for investing ethically, independently of the money available to invest. When all is said and done, where is it written that the first investment of a young person should be a mortgage account?

  1. Consider what “ethical” means for you: there are dozens of ethical funds to choose from in every country, each one with its own criteria. Maybe we’re clear that we don’t want to invest in alcohol, tobacco, pornography, or arms. But, what happens if we believe that nuclear energy can play a positive and necessary role in the transition to renewable energies? Or, should the use of animals in testing be given the same ethical weight for cosmetics as for medicines? Boundaries exist that the individual should establish, in function of their own convictions. Various funds offer in their portfolio businesses like petroleum companies (BP, Shell, Total and Repsol, among others). Many of us wouldn’t agree that a fund with these values can be considered “ethical”.
  2. Dedicate time to research: there are plenty of studies and research mentioned in this article. Various banks, credit unions and portfolio management businesses offer tools to understand ethical financial products. Fund managers with strong research teams include Aegon, F&C, Jupiter, Legal & General, Norwich Union, Portfolio 21, Standard Life and Winslow Management.
  3. Finding a financial advisor in which you trust (and one that gives you time, independently of the amount of money you are going to invest). An ethical investment doesn’t require opening a private banking account or a large fortune.
  4. Consider your attitude toward risk and your predisposition to run from it: this investment principle works in the same way whether it’s regardingrenewables or ballistic missiles. There is a risk, that can predefine itself in the characteristics of the financial product. The most aggressive and experienced investors invest in high risk companies, whether small firms that are investigating new technologies or renewable energy. The safest stocks are usually very stable, such that the return on investment can be very limited when there isn’t much risk. Also, the investment rule “diversify” still applies when talking about ethical investing.
  5. Study the tax deductions that you can obtain, in function of the fiscal policies of every country.
  6. Choose an ethical pension plan (they exist). If the banking office with which you’ve worked your entire life doesn’t offer this product, ask for it. Sometimes, it’s the individual office that doesn’t promote the most novel products because it requires previous knowledge, studying certain documentation,etcetera. Several firms specialized in pension plans offer offer ethical funds, like Axa, Friends Provident, Legal & General, Norwich Union, Prudential and Skandia, among others.
  7. Choose carefully the manager of your ethical investment. The Guardian asked the expert in ethical funds Sagarika Chatterjee, of the firm F&C, about the criteria to follow to choose an investment advisor. There are no magic prescriptions, although she says that the best method is to ask oneself if theadvisor’s ethical criteria seem rigorous. Intuition is important. Also, find out if they have stands on controversial topics like biofuels or are looking at investments in promising areas like organic food, climate change, waste and water.
  8. Be ready to have, above all at the beginning, a modest return on investment: ethical funds compete with those that allow investment in any company. There are companies with few ethics that offer spectacular returns on investment so that some unethical products are financially more attractive than the ethical, above all in the short-term. Although this situation is changing, with increasingly greater industrial attention in markets such as renewable energies, for example.
  9. The performance of an investment is fundamental, and the fact that it is considered “ethical” does not imply that it comply with conditions that are not as profitable as those of other products. The Guardian recommends finding a balance between principles and benefits. Also it brings up that the past performance of a fund does not guarantee similar returns in the future.
  10. Being consistent: it doesn’t make sense to drive a Hummer and go buy bread in it, or to shop at the worst supermarket in your country in environmental and social terms, and at the same time invest in ethical funds.

Which data to trust: research about social responsibility

Ethical investment implies researching in which financial products, institutions, businesses or people the investor wants to trust, once they have assured themselves that the investment can be defined as socially responsible.

But how do you know if an investment is ethical or simply a facade more or less “green” and attractive? Which reliable information, rankings, reports, statistics or evaluation firms are the experts using to clarify if an investment is ethical or not?

There is not a completely clear answer to these questions, although there is abundant information about social responsibility and good governance. Numerous research centers and financial analysts have specialized in investigating responsible business behavior.

These research centers analyze the behavior businesses using environmental, ethical and social responsibility parameters that they define. They offer online databases and rankings and profiles of businesses, related to ethical, environmental, and social criteria.

All of them are confronted with the difficulty of measuring criteria that varies in function of the business culture of individual countries, the size of the businesses, the economic situation or the sector of activity of the businesses or institutions analyzed with their criteria.

Despite the limitations, the information facilitated by these centers is the main business tool of ethical investment managers worldwide.

Principal research centers regarding responsible business behavior (source: Observatory 2007 of Socially Responsible Investment, by LauraAlbareda, María Rosario Balaguer and Daniel Arenas, published by the Institute of Social Innovation of Esade; Wikipedia; Center for Responsible Business):

  • SiRi Company: worldwide web of research centers regarding business behavior in the fields of socially responsible investment and socially responsible businesses. Develop business analyses about the politics of sociallyresponsiblity, with which they work in function of the local characteristics in every marketplace. Members: Analistas Internacionales en Sostenibilidad (Spain), Centre Info (Switzerland), Dutch Sustainability Research BV (Holand), GES Investment Services AB (Sweden), Kayema Investment Research & Analysis (Israel), KLD Research & Analytics (United States), Jantzi Research (Canada), Pensions & Investment Research Consultants (United Kingdom), Scoris (Germany), y SIRIS (Australia).
  • Innovest: research center regarding business behavior in relation to ethical investment. Offers services related to socially responsible, environmental and corporate governance criteria.
  • Mercer Investment Consulting: a financial analysis company with an office in London dedicated to socially responsible investment.
  • Trucost: an environmental research organization that helps businesses and investors analyze the environmental impact of their business activity. Offers databases and analysis regarding the emissions of greenhouse gasses and the development of renewable energies.
  • JP Morgan Climate Change Investment Research: the financial analyst JP Morgan has created a new accounting service that analyzes the risks and opportunities associated with climate change. Offers information about business behavior in relation to the emission of greenhouse gasses and renewable energies.
  • EIRIS y FTSE4Good Index Series: British research center that investigates the ethical behavior of businesses and publishes databases, reports and ratings about corporate behavior. This is the research in which the financial indexFTSE4Good Index Series is based.

The data that is provided by these research centers is fundamental to fund managers. Beginning with this information, they develop investment portfolios for socially responsible investment funds.

Guide to resources regarding socially responsible investment (SRI) or ethical investment