One of the most effective ways to encourage more people to shop ethically and support the development of more ethical businesses is through ethical investment. The idea of using your money wisely has been around for a long time, but only recently has it become a mainstream means of supporting a good cause. With a growth in awareness about ethical investment’s benefits on the part of companies as well as investors, it is becoming ever easier to put your money where your mouth is.
A long history
The roots of ethical investment can be traced to the religious movements of the nineteenth century, such as the Quakers and Methodists, whose concerns included issues such as temperance and fair employment conditions. At the beginning of the 1900s, the Methodist Church began investing in the stock market, consciously avoiding companies involved in alcohol and gambling.
During the twentieth century, more churches, charities and individuals began to take ethical criteria into account when making investment choices. An ethical investment ideology began to develop in the US as controversy over American involvement in the Vietnam war led to the founding of the Pax World Fund in 1971, which aimed to avoid investments associated with the war. In the 1980s, the apartheid regime in South Africa was the focal point for ethical investment and, indeed, its success as a tool of protest there accelerated its acceptance and growth around the world.
In 1983 the Ethical Investment Research Service (EIRIS) was established as the UK’s first independent research service in ethical investment, providing the underlying research into companies’ social, environmental and ethical performance needed by investors to make informed and socially responsible investment decisions. The UK’s first ethically screened unit trust – the Stewardship Fund – was launched by Friends Provident a year later. EIRIS estimated that as at end of July 2015 there was over £15 billion invested in the UK’s green and ethical retail funds. This estimate is based on around 83 UK domiciled green or ethical retail funds and it seeks to not include UK money invested in ethical funds domiciled outside of the UK. This growth in SRI (socially responsible investment) has been reflected globally. For example, the Asia-Pacific region has seen the launch of several SRI funds in places such as Japan, Australia and Singapore. In Europe there were 170 ethical funds in 1999 which had grown to 1,204 by the middle of 2015.
‘Ethical’ or ‘socially responsible’ investment describes any area of the financial sector where the principles of the investor inform where they place their money. Companies big and small have an increasingly large impact upon the world around them. How they conduct their business can affect all manner of things beyond the actual product or service they provide. There is a growing awareness that, alongside simply choosing to buy or not to buy their products, those of us who invest our spare money can also influence companies towards better social and environmental behaviour.
With any standard unit trust, investment trust, ISA or pension you may find your money going to companies that you would not wish to support. An ardent anti-smoker, for example, would be dismayed to discover that their savings were invested in a tobacco company. Whether your investments are limited to a pension fund, or if you’re more involved in the stock market, knowing as much as you can about the ethics of the financial companies you’re investing in can be as important as choosing an environmentally sound washing-up liquid. In fact, as a recent War on Want campaign (encouraging the 10 million people who are occupational pension scheme members to find out where their money is invested) shows, you can use your influence no matter how small your investments might seem.
How do I begin?
The first step towards positive investing is to identify what social, environmental and other ethical issues are most important to you. Areas of concern can be wide ranging, from animal testing to gambling, from human rights to nuclear power, from environmental enhancement to community involvement. Surveys by EIRIS have shown that the most prominent areas of concern are operations in oppressive regimes, breaking environmental regulations and testing products on animals. The companies that respondents preferred their pension funds to be invested in were those with good records on environmental issues and employment conditions. Identifying these areas will reflect the type of companies you want to invest in or to avoid.
It is important, however, to remember that there is no such thing as a perfect company. All are involved in activities that someone somewhere will object to, and none go far enough in terms of positive social and environmental contribution to satisfy all of the people all of the time. Ethical investment is about compromising and prioritising.
Engagement: No companies are excluded but areas are identified in which companies can improve their environmental, social and ethical performance. The fund managers then ‘engage’ with the companies to encourage them to make such improvements.
Preference: The funds adopt social, environmental or other ethical guidelines which they prefer companies to meet. These guidelines are applied where all other things are equal (e.g. financial performance).
Screening: An acceptable list of companies is created based on chosen positive and/or negative criteria (e.g. avoid companies involved in the arms trade, include companies with good environmental performance and so on). Funds are invested only in those companies on the list
Types of funds
Once you’ve worked out your individual criteria, there are a diverse range of ethical funds available, and different funds suit different investors. Some funds select a set of criteria which they believe will appeal to the widest range of investors. Others take a precisely focused approach, designed to appeal to a particular market. It is therefore very important to look behind the ‘green’ or ‘ethical’ label at what the fund is actually investing in before deciding to invest.
- How does the fund research the activities of the companies in which it invests?
- Is there an ethical committee or advisory board that is independent of the investment process, to make sure the fund adheres to its published ethical policy?
- How good is the fund’s communication with investors, e.g. does it have mechanisms in place to allow investors to voice their concerns?
- How active is the fund in engaging or communicating with companies? Does it encourage companies to improve their social and environmental performance?
A two-pronged approach
Ethical investing works in two ways:
- by using the individual’s power as a shareholder to influence corporate behaviour
- by their decision to invest only in companies who behave in a socially responsible manner
One method of shareholder influence, which is particularly useful for the publicity it often receives, is the practice of posting shareholder resolutions which companies then have to consider in public at their annual general meetings. Campaigners say that the rules governing who can put forward a shareholder resolution are more restrictive in the UK than in the US. Nonetheless, a prominent UK example is the resolution placed before BP’s spring 2002 AGM, filed by the global environment network WWF, together with an international coalition of ethical investors, on its drilling activities in environmentally and culturally sensitive areas. This is one part of the campaign to prevent BP and others from drilling for oil in places such as the Alaskan Arctic National Wildlife Refuge, which is one of the last pristine areas left in the US and is currently off-limits to oil and gas exploration and development.
The idea of shareholder power is relatively new, but it is becoming more prominent amongst NGOs. It can have some real results, as the case study below shows.
Voting for change
Shareholder resolutions, one of the more flamboyant ways of investing ethically, have been shown to work. Friends of the Earth used a shareholder resolution as part of its campaign against Balfour Beatty’s plans to build a controversial dam in Turkey – the Ilisu dam on the Tiber River, 40 kilometres from the border of Syria and Iraq. Protest groups warned that the dam would make 78,000 local people homeless and drown dozens of towns and villages, including the world historic site of Hasankeyf. FoE bought £30,000 worth of shares in order to submit a resolution on the dam contract at Balfour Beatty’s AGM.
Some months later, the company pulled out of the project, announcing that ‘after a thorough evaluation of the commercial, environmental and social issues, it is not in the best interests of our stakeholders to pursue the project further’.
Ethical investment is not confined to shares traded in stock exchanges. Many investors prefer to back individual projects or causes. Such directed investment is known by a variety of terms including ‘alternative’ investment, ‘mission-based’ investment and ‘socially directed’ investment. Examples of cause-based investment include regeneration projects in Birmingham (through the Aston Reinvestment Trust), and the support of projects in developing countries (through the co-operative lending society, Shared Interest). The cause-based investment sector is currently dominated by financial institutions such as Triodos Bank and the Ecology Building Society, although it also includes ethical companies who raise money directly from stakeholders by selling ‘ethical shares’. Such companies include Traidcraft and the Centre for Alternative Technology.
Good for everybody
You don’t need to worry that concentrating on ethical investments will make your financial performance suffer. Research by EIRIS and others indicates that investing according to ethical criteria may make little difference to overall financial performance, depending on the ethical policy applied. Five ethical indexes created by EIRIS produced financial returns roughly equivalent to the returns from the FTSE All-Share Index. For example, the total return of the Charities’ Avoidance Index, which excludes the vast majority of companies involved in tobacco, gambling, alcohol, military sales and pornography, was 0.38 per cent greater than the All-Share.
Companies, too, can benefit. Over £3 billion is already invested in companies screened for good social, environmental and ethical practice by retail investors. Many churches and charities, pension schemes and local authorities are also investing according to socially responsible investment policies. That means money is being consciously diverted from companies that cannot demonstrate this good practice. Many investors are also engaging with companies in which they invest, or are considering investing in, to persuade them to improve their policies and practices.
You can get further information by contacting the organisations listed below:
The UK Social Investment Forum is a membership network that promotes and encourages socially responsible investment in the UK, including shareholder activism, social banking and community finance (www.uksif.org).
Tel: 0207 749 9950
The European Sustainable and Responsible Investment Forum (Eurosif) is a nonprofit organisation promoting the concept, practice and development of responsible and sustainable investment (www.eurosif.info).
And you can find a comprehensive list of ethical investments and ISAs, which include tick-boxes indicating specific ethical issues address by each fund, on YourEthicalMoney.org from the EIRIS Foundation (www.yourethicalmoney.org/investments/)
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