The case for ethical investing Moneyweek debate. – MoneyWeek

ByTimPrice

Thefinancialservicesindustryispronetofads。

Internetandtechnology-themedfundsareprobablythemostdevastatingrecentexamples,butthedamagetheyinflictedonfad-followinginvestors(andonthecredibilityoffund-managementcompaniesthatsteppeduptomeetpublicdemandforthem)wassector-specific。

Ethicalinvestingcouldbemoredangerousyet,inthatitrepresentsanentirephilosophyofmoneymanagementthatsitsuneasilywiththeprinciplessupportingafreecapitalmarket。

Whatpreciselyconstitutes“ethicalinvesting”isnotclear。

TheonlinencyclopediaWikipediadefinesethicalinvestingasinvestmentthatdecidesnottofundarmsmanufactureandsales,questionablelabourpractices,orlaenvironmentalstandards。

Mostinvestorswouldconcedethatprofitsfromdeath,exploitationorpollutionaredifficulttoswallow。

ButinvestmentfirmDominiSocialInvestments,whichmanagesmorethan$1bninassetsforthose“whowishtointegratesocialandenvironmentalcriteriaintotheirinvestmentdecisions”,goesfurther–theyavoidtobacco,alcohol,gamblingandnuclearpower。

DoesthismeanthatBigOilandBigCoal(bothinherentlyfilthybusinesseswithanacknowledgedtrackrecordofoccasionallykillingworkers)makeitin?

Ethicalinvestmentstartstolookworryinglysubjective。

Asat31March2005,someofthelargestholdingswithintheDominiSocialEquityFund,oneofthelarger“sociallyresponsible”funds,weresharesinMicrosoftandAmericanInternational。

Evidently,market-abusingmonopolistsandfirmsunderinvestigationforimproperaccountingareperfectly“ethical”。

Thebeautyofinvestmentmarketsisthattheyconstituteaself-perpetuatinmechanismthatrewardssuccess。

Anythingthatimpedesthefreeflowofcapital–suchasasubjectiveassessmentofpresumedethicalsuperiority–is,allthingsbeingequal,likelytoresultinsub-optimalreturns。

Theinvestmentmarketsarenotmotivatedbyfuzzyconceptssuchas‘inclusion’andsocialjustice。

Whatdrivesthemisgreedandfear–theexpectationofprofitandtheavoidanceoftheprospectofloss。

Anyfinancialmarket,likelifeitself,operatesonDarwinianprinciples。

Investingsolelyonthebasisofethicalissuesamountstocripplingoneselfandone’sopportunities。

Butperhapsthebiggestreasontobesuspiciousofethicalinvestingisthatitdoesn’twork。

AccordingtoBloomberg,since2000theDominiSocialEquityFunhaslaggedtheSP500(whichhasitselffallenby14%)bymorethan8%。

Thereisawordforproactivelypursuinginvestmentlosses:folly。

Toaddinsulttoinjury,arivalfundthatisthepolaroppositeofDominihasperformeswimmingly。

Mutuals。

com’sViceFund,runbyDanAhrens,hasdeliveredtotareturnsof61%sinceinceptioninSeptember2002,outperformingtheSP500indexbymorethan12%。

UnlikeDomini,itembracesthearmsbusiness,alcohol,gamblingandtobacco。

Youmaynotlikethesesectors,buttheyarelegalanddogenerategoodreturns。

Let’sfacefacts。

Weliveinanenvironmentoflownominalreturns。

Globainterestratesareslender,bondmarketslookovervaluedbymoststandardsandanumberofG8economiesareonthebrinkofrecession。

Findingprofitsisdifficultenough,withouthobblingyourselfwith‘ethical’investment。

TimPriceisseniorinvestmentstrategistforAnsbacherCo

Ethicalinvestorsmakemoneyanddogood

ByMarkMansley

Afteryearsofbeingseenasaratheresotericandminorityactivity,ethicainvestinganditstraditionalconcernsareincreasinglyenteringthemainstream–agrowingnumberofinstitutionsareoffering‘ethical’products。

Still,thiswideracceptancehasn’tstoppedthecriticismrollinginfrommanyquarters。

Forexample,somearguethatitisimpossibletoapplyethicalprinciplesensibly。

Thismaybebecausecompaniesareinterdependent,theissuesinvolvedarecomplex,orbecauseitisseentobetheroleofgovernments,nobusinesses,tointerveneifnecessary。

Whatthisviewfailstotakeintoaccounisthenatureofmostethicalinvestors:theyarereasonablypragmaticandseethicalinvestmentasawayofcontributingtoa‘betterworld’,notasaattempttocreatea‘perfectworld’。

Theyrecognisethatsometimesitidifficulttodrawalinebetweenacceptableandunacceptablebehaviour,andthattheissuesarecomplex。

Buttheyalsofeelthatsomeactivitiesarindefensible,thatsomeactionisappropriate,andthatitisbettertoattemptodosomethingthansimplytoignoretheissuealtogether。

Anothercommoncriticismisthatthereisnocommongroundforethicsasethicsarepurelysubjective。

This,however,isnotafundamentalproblem。

Manyethicalissuesandconcernsarebroadlyshared–tobaccoandarms,severeenvironmentaldamageandhuman-rightsabuses,forexample。

Thismakesitpossibletodevelopfundsthatappealtomostethicalinvestors。

Furthermore,thesebroadlysharedconcernscangeneraterealopportunitiesforbusiness,preciselybecauseaddressingthemcangivethebusinessagoodreputation。

Morerecently,ethicalinvestmenthasfacedanothercriticism:thatfollowingoodcorporategovernanceandsupportingethicalprinciplesiswhatanygoodfundmanagershouldbedoinganyway,sothe‘ethical’labelismerelyasalesgimmick。

Formanyinethicalinvestment,thiscriticismfeelsmorelikecompliment。

True,manyethicalconcerns–goodcorporategovernance,thsignificanceofnon-financialrisks,theimportanceofethicalissuestofirmwhosevalueisintangible–arenowwidelyrecognisedbyotherinvestors,anthatisabigendorsement。

ButethicalinvestorswillcontinuetobedifferentUnlikemainstreaminvestors,theywon’tdemandextensiveevidencebeforacceptingthevalidityofaparticularconcernandwillbepreparedtoactouofprinciple。

Interestingly,thismaywellenablethemtowinafinancialadvantagetoo。

Bbeingmorereadytorespondtonewordevelopingissues,ethicalinvestorshouldremainaheadofthecurve。

Forexample,ParmalatwasexcludedfromtheRathbonesEthicalBondFundbecauseinconsistentresponsestoourenquirieshighlighteditslabyrinthinenature。

Wemaynothaveknownthespecificreasonforitsfailure,butwegotaninsightintoParmalat’sinternalaccountabilitythatotherinvestorswouldhavebeenunlikelytopickupon。

Thislevelofdiligencewhenchoosingstocksgivesusanextralayerofresearchthathelpsunearthpotentiallyharmful,unethicalcorporateproblemsthatcouldleadtodamaginglitigationandweakercreditratings。

Finally,thosewhocriticiseethicalinvestmentshouldrecognisethatethicalinvestorsareinfactmoredemandingthanmost–theydemandnotonlyfinancialperformance,butalsoanethicalreturn。

Thisposesachallengetothoseofuswhoprovideethicalinvestmentservices,butit’sonetowhichwearehappytorespond。

MarkMansleyisstrategyandcommunicationsmanageratRathboneGreenbankInvestments

Thetopethicalperformers

Whenethicalfundsfirstemergedintheearly1980stheywerenicknamed“Brazilfunds”becausetheywereonlyfornuts,saysTheSundayTelegraph。

Anddespitegoodgrowthinassetsundermanagementoverthelastfewyears,theyremainanichebusinessformostfundproviders:only1。

95%ofthe£78。

4bninvestedinUKAllCompaniessectorfundsisinvestedinethicalfunds。

Traditionally,ethicalinvestmenthasexcludedfirmsinvolvedinindustriessuchasgambling,tobacco,armamentsandalcohol。

Itisnolongerthatstraightforward。

Today,afund’sethicalcommitmentiscategorisedindifferentshadesofgreen。

Dark-greenfundshavemorerigidcriteriathanlight-greenones。

Theywouldnot,forexample,dreamofinvestinginanoilfirm。

Light-greenfundswillinvest,butwillchoosethebestofbreedwithinasector–forexample,theywillchoosethemostresponsibleoftheoilfirmsratherthanexcludingthewholesectoronprinciple。

Inrecentyearsethicalfundshaven’tunderperformed。

StandardPoor’stoldTheTimesthatwhiletheaverageFTSE100trackerhasreturned1。

92%overthreeyears,theaverageethicalfundhasreturned4。

19%。

Thetop-performingethicalfund,FCStewardshipIncome,oneofthedarkestgreenfunds,returnedaveryimpressive41%,makingitthefourth-bestperformerinitspeergroup(theequityincomesector,whichincludesnon-ethicalfunds)。

Itisnotalone,saysTheTimes。

InsightInvestmentEuropeanEthicalhasreturnedmorethan30%overthreeyearsandMorleySFCorporateBond27%。

“Ethicalfundswillhavetheirupsanddowns,”PhilipChapmanatHoldenMeehan,anadvisoryfirmthatspecialisesinethicalinvestments,toldTheSundayTelegraph。

Somehavesufferedfromlowornoexposuretosurgingoilshares,forexample。

“But,overthelongerterm,investorsshouldbeabletorideouttheseupsanddowns”

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