ETHICAL INVESTMENT

Ethical or Sustainable Responsible Investment (SRI) is the integration of personal values with investment decisions. It is an approach to investing that considers both the profit potential and the investment's impact on society and the environment.

Sustainable Responsible Investment may avoid industries such as gaming, tobacco, armaments or uranium mining and companies with little regard for the environment, governance, and labour and human rights. On the other hand, SRI may also actively seek out profitable 'industries of the future' that are positive for society and the environment such as renewable energy, biotechnology, water management, waste management and health care.

Many investors want their investment holdings to reflect their values, and support companies that behave in ways they consider appropriate or responsible. That is why growing numbers are getting behind investment managers and companies that are perceived to be doing the right thing on a range of ethical, social and environmental issues.

Ethical, or socially responsible investing can take many forms, but according to the Ethical Investment Association of Australia, the most established ways of investing ethically are:

• Negative screening - which means avoiding some types of investments eg. gambling companies or weapons manufacturers.
• Positive screening - which involves a preference for activities or characteristics deemed desirable eg. future-oriented industries such as renewable energy and health care.
• Best of sector - which involves selecting leading firms in every business sector, based on their environmental and social performance or sustainability.
• Social responsibility overlay - which involves selecting shares for a portfolio in the usual way, but adding a process for addressing issues related to social responsibility.

In spite of the rise in popularity of socially responsible funds opponents have argued that by excluding many stocks in a particular sector (for example, resources), such funds will be disadvantaged when these sectors do well. Even when ethical funds perform well, there has been criticism that the positive performance would be short lived. This is not the case. While past performance is not a reliable indicator of future performance, many ethical investment funds have performed as well as or better than conventional peers over considerable periods of time.

SRI out-performance in Australia

1 year 2 years 3 years 5 years  ASX 200 30.35% 27.97% 26.43% 14.83%  SRI Median 31.00% 28.91% 27.02% 17.08%

Source: AMP Capital SRI Industry Performance Study, May 2006.

Which just goes to show investors are able to have the best of both worlds by obtaining excellent financial returns while also supporting socially responsible companies.

Under Australian Corporations Law, investment managers are required to show in their Product Disclosure Statements "the extent to which labour standards or environmental, social or ethical considerations are taken into account in the selection, retention or realisation of the investment". This is designed to encourage transparency and allow investors to compare one product with another. However, compliance levels are still patchy with the scope and content of relevant information disclosures varying from manager to manager.

Information courtesy of Ethical Investment Association, Finsia and Australian Stock Exchange

HISTORY OF SOCIALLY RESPONSIBLE INVESTING

The beginning of socially responsible investing could be attributed to many people and many places. Many believe social investing began with the Religious Society of Friends (Quakers). In 1758, the Quaker Philadelphia Yearly Meeting prohibited members from participating in the business of buying or selling humans. Religious institutions have been at the forefront of social investing ever since. One of the most articulate early adopters of SRI was John Wesley (1703-1791), one of the founders of the Methodist Church. A sermon of his, entitled "The Use of Money," outlined his basic tenets of social investing – i.e. not to harm your neighbor through your business practices and to avoid industries like tanning and chemical production that pollute rivers and streams.

In the late 1970s, SRI activism turned its attention to nuclear power and automobile emissions control. These issues, and the people who promoted them, established the groundwork for SRI as it is today.

From the 70's to the early 90's, large institutions avoided investment in companies that were related to the government and apartheid policies of South Africa . After the Sharpeville Massacre in 1960, international opposition to apartheid strengthened. In 1976 the United Nations imposed a mandatory arms embargo against South Africa . In 1971, Reverend Leon Sullivan (at the time a board member for General Motors) drafted a code of conduct for practicing business in South Africa which became known as the "Sullivan Principles." These principles sought to document the practices of American companies within South Africa . Reports documenting the application of the Sullivan Principles discovered that US companies were not attempting to lessen discrimination within South Africa. Because of these reports and mounting political pressure; cities, states, colleges, faith-based groups and pension funds throughout the United States began divesting (or removing their investments) from companies operating in South Africa. The subsequent negative flow of investment dollars eventually forced a group of businesses, representing 75% of South African employers, to draft a charter calling for an end to apartheid. While the SRI efforts alone didn't bring an end to apartheid, it did focus persuasive international pressure on the South African business community.

CORPORATE SOCIAL RESPONSIBILITY

Corporate social responsibility (CSR) is a concept that suggests that commercial corporations have a duty of care to all of their stakeholders in all aspects of their business operations. A company’s stakeholders are all those who are influenced by, or can influence, a business’s decisions and actions. These can include (but are not limited to): employees, customers, suppliers, community organizations, subsidiaries and affiliates, joint venture partners, local neighborhoods, investors, and shareholders.

CSR requires that businesses account for and measure the actual or potential economic, social and environmental impacts of their decisions. In some cases the application of a strong CSR policy by a business can involve actions being taken which exceed the mere compliance with minimum legal requirements. This can sometimes give a company a competitive/reputational advantage by demonstrating that they have the interests of society at large as an integral part of their policy making. CSR goes beyond simple philanthropy and is more about corporate behaviour than it is about a company's charitable donation budget.

CSR is closely linked with the principles of Sustainable Development which argue that enterprises should be obliged to make decisions based not only on financial/economic factors (e.g. Profits, Return on Investment, dividend payments etc.) but also on the social, environmental and other consequences of their activities.

Development and analysis

Today’s heightened interest in the role of businesses in society has been promoted by increased sensitivity to, and awareness of environmental and ethical issues. Issues like environmental damage, improper treatment of workers, and faulty production leading to customers inconvenience or danger, are highlighted in the media. In some countries government regulation regarding environmental and social issues has increased, and standards and laws are also often set at a supranational level (e.g., by the European Union). Some investors and investment fund managers have begun to take account of a corporation’s CSR policy in making investment decisions (so called "ethical investing"). Some consumers have become increasingly sensitive to the CSR performance of the companies from which they buy their goods and services. These trends have contributed to the pressure on companies to operate in an economically, socially and environmentally sustainable way.

It is important to distinguish CSR from charitable donations and "good works" (i.e., philanthropy, e.g., Habitat for Humanity or Ronald McDonald House). Corporations have often, in the past, spent money on community projects, the endowment of scholarships, and the establishment of foundations. They have also often encouraged their employees to volunteer to take part in community work and thereby create goodwill in the community which will directly enhance the reputation of the company and strengthen its brand. CSR goes beyond charity and requires that a responsible company take into full account their impact on all stakeholders and on the environment when making decisions. This requires them to balance the needs of all stakeholders with their need to make a profit and reward their shareholders adequately.

A widely quoted definition by the World Business Council for Sustainable Development states that "Corporate social responsibility is the continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as of the local community and society at large." (CSR: Meeting Changing Expectations, 1999). This holistic approach to business regards organizations as (for example) being full partners in their communities, rather than seeing them more narrowly as being primarily in business to make profits and serve the needs of their shareholders.

Information courtesy of Wikipedia