Nov 11, 2010
There was a time when letting your conscience enter into your
investing decisions was like bringing a water pistol to a knife
fight. There was no place for it, not if you wanted to win.
Back in the 1960s, when the do-gooders first really mobilised against
big business, the perception among professional investors was
basically: "Show me a man with a Save the Whales sticker on the back
of his Chevrolet and I will show you a man who probably will not be
able to upgrade to a Cadillac anytime soon."
The hearts of the top investors were dark chambers, filled with
napalm, coal and unfiltered cigarette smoke, certainly not hospitable
places for cuddly endangered species, organic produce and Joan Baez.
It was not so much that these investors hated the environment or
loved war as much as they appreciated the fat dividends that Phillip
Morris and Dow Chemical delivered every quarter.
Times have been steadily a- changin' since then and "socially
responsible investing" is now one of the buzzwords of the industry. A
primary reason is the growing body of research showing that being a
do-gooder no longer means lagging behind the rest of the market.
One analyst last year created what he called the Human Impact +
Profit (HIP) Index, which proceeded to outperform the S&P 500 by four
percentage points in its first year.
A survey of fund managers found that 90 per cent said their socially
responsible funds performed just as well as those with traditional
allocations, while another determined that responsible investing will
reach as high as 20 per cent of global funds under management by
2015. Even Wall Street's evil overlord, Goldman Sachs, is in the game
with a fund called the Sustain Portfolio, comprised of companies
tackling climate change.
Another reason ethical investing has gone mainstream is that the
category is no longer limited to wind farms and manufacturers of
cloth nappies, but now includes companies that are leading their
sectors in important ways.
Many fund managers tout Google as a green company for its efforts to
reduce energy consumption. Not so long ago, BP was a member of the
Dow Jones Sustainability Index, although it was forced to relinquish
its membership after the oil spill in the Gulf of Mexico tarnished
its credibility in environmental circles.
The point is that there are several different ways to identify the
investment vehicles that help you do well by doing good.
The old-school way is through screening, both positive and negative.
On the positive side, this would mean choosing companies that exist
less to make profits than to make positive contributions to society.
The criteria could vary, but many target companies with strong
environmental practices, safety records and employee relations. A
negative screen weeds out industries that are considered sinful or
destructive to society by some people, with tobacco companies,
weapons manufacturers and gambling conglomerates as examples of the
types of stocks that have long been shunned.
A less obvious means of responsible investing is through shareholder
advocacy, in which investors push companies to follow policies that
match certain objectives, whether that means finding ways for the
firm to make less of an environmental impact or altering the
company's political activism.
Because of the growth of the sector, there is no shortage of options
for investors looking to align their personal beliefs with their
finances. Stock picking is one way, although the BP disaster
highlights what can happen if a company violates the principles it
claims to stand for. In addition, western economies are generally
ahead of emerging markets in environmental standards and labour
practices, so it can be a challenge to achieve the appropriate diversification.
The vast majority of the big fund companies offer a variety of
socially responsible options, everything from equity funds to bond
funds of emerging countries with progressive governments.
Friends Provident, the investment firm that is active in the Gulf,
was one of the first global companies to create a range of ethical
funds and continues to expand what it calls its Stewardship Funds.
These vehicles could be a good fit for expats in the UAE.
The key is to read the prospectus closely to discern how the fund
chooses its stocks and/or bonds. What may be perfectly acceptable
behaviour to one person may be abhorrent to you. It also makes sense
to find out what steps the fund takes to keep companies accountable
to certain policies.
Other investors, particularly Muslims, may also want to take a look
at the growing number of Sharia-compliant funds, which now comprise a
US$1 trillion (Dh3.67tn) industry. This ensures that the funds do not
own any companies or products that are haram, such as those related
to alcohol, pork or gambling.
Sharia-compliant products are open to all investors, but those not
familiar with Sharia law should make sure they understand all of the
ramifications - such as how Sharia forbids the collecting or paying
of interest, which means profits are created through the trade in
This allowed many Sharia-compliant funds to sidestep some of the
fallout from the financial crisis, but creates a different set of risks.
When it comes to socially responsible investing, there is something
for everybody - with no vow of poverty required.