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Investment News

Ethical Investing: Avoiding sin stocks popular

In the first of a new series on Ethical Investing we explain why people are chosing to put their money into funds which avoiding the so-called "sin stocks".

Wednesday, January 17th 2001, 7:05AM

Investors have traditionally focused on financial returns when choosing where to place their money, but there is now a growing international trend for them to seek social and environmental returns as well.

Ethical or social conscience investing is already well established in the United States and Australia, where investors can select investments which put money into sectors they wish to support and avoid those with which they are not comfortable. Examples might be alcohol, tobacco or polluting companies.

Tower Asset Management Ltd’s business development manager Mel Hewitson says social or ethical investing involves integrating personal values and societal concerns into the investment decision-making process.

An early Australian example was Tyndall Ethical Balanced Trust, which did not invest in alcohol, tobacco or mines, selecting stocks based on value and then having them vetted by a special committee of the Young Women’s Christian Association.

Socially invested funds now exceed US$2 trillion in value in the United States, or one out of every eight dollars invested. More and more social investment options are entering the market and institutional investors such as state pension plans are adding ethical policies to the management of their portfolios.

In the United Kingdom, social investment exceed Pounds 25 billion in value. Hewitson says legislation introduced there this year requires trustees of occupational pension schemes to disclose in their statements of investment policy the extent to which ethical considerations are taken into account in managing investments.

There are more than 12 ethical funds managers operating in Australia, and an ethical disclosure bill relating to retail funds has been proposed.

Hewitson says the international explosion in ethical investing is being driven by greater numbers of female investors, new investors concerned about social and environmental impacts, a renewal of basic values, and the discovery that performance does not have to be sacrificed to invest with heart.

She says early ethical investing focused on screening out "bad" investments such as tobacco, alcohol and armaments. One example would be the Red Cross avoiding investing in a landmines manufacturer.

That approach has now given way to positive screening to favour "good" companies. Positive screening rewards companies which demonstrate commitment to socially responsible business practices in relation to staff, customers, suppliers, the community and the environment.

Positive stock selection seeks to identify the industries of the future. In the car industry, for instance, opportunities could include development of new types of energy-efficient, low emission engines.

Hewitson says positive screening may also involve a best of sector approach, with all sectors included in investments but only the best stocks within the sector being selected.

Social conscience investing has been slow to take off in New Zealand, partly because the small size of the market makes it difficult to create specialised funds. Bridgecorp’s Andy Harris says there is also a question mark over whether ethical investment inevitably involves lower financial returns.

"It’s one of those things where investors would like investments to be ethical, but if it’s a choice between a 15 per cent and a 12 per cent return, they’ll go for the 15 per cent."

However, a number of developments signal that New Zealand is now becoming part of the international trend to ethical investing. The 50 members of the Business Council for Sustainable Development, headed by Fletcher Challenge CEO Michael Andrews and the Warehouse’s Stephen Tyndall have committed themselves to producing ethical accounting reports within the next 12 months. This will make it easier for investors to assess which companies they wish to invest in.

Ethical accounting adds another dimension to company reports, requiring the company to disclose how it deals with environmental and ethical issues so that outsiders can assess those matters alongside financial performance.

Internationally, the Institute of Social and Ethical Accounting last year launched an ethical accounting standard which is being used by companies such as British Telecom and the Body Shop.

The AMP Henderson Ethical Fund is now being promoted in New Zealand, giving investors direct access to a large fund focused on ethical issues and meaning that they no longer need to invest on an individual basis.

Churches have for a long time asked their business advisers not to invest money in tobacco, gambling or other "sin stocks."

Another development is the evolution of community based funds, which provide capital for local projects investors wish to support. One example is Prometheus, which lends money for health, educational and environmental projects. If Prometheus lends money to a school, all of the parents will guarantee $100 each, providing financial security and ensuring grassroots community involvement.

The fund fulfils an intermediary role, screening prospective borrowers, monitoring them and assisting with administration. Other community-based funds are the Women’s Local Fund and Just Dollars.

Internationally, the loss rate for community based funds is lower than that relating to conventional lending. Community funds are favoured by those investors who plce primary emphasis on action within their local spheres.

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