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About Socially Responsible Investment

Posted on 12/09/04 by admin

Ethical Investment

Okay, let's get real: companies are never going to risk profits in the cause of ethics if they can get away with it. Individual employees would no doubt prefer their company to respect the law, the environment and human rights, but in a sense they are powerless to influence its activities. It's the shareholders that own it that the company answers to - without the shareholders' support, the company has no right to do anything.

This is why ethical investment is such an important tool. Companies are bound to maximising the value of their shares, and will pursue policies that achieve this. Ethical investment works by increasing/decreasing the value of a company's shares according to whether its activities are ethical/unethical, thereby encouraging the company to act in a socially responsible way.

For example, disinvestment (getting rid of shares by selling them) in a certain company will drive down the value of its shares by increasing their supply in the stock market. This will be a force for change as shareholders and company management strive to push the value back up again.

On one level, the management executives in the company will be much more keen to change company policy because lower share values mean a greater chance that they will lose their jobs. A Chief Executive Officer who cannot deliver shareholder value will not be kept in power - s/he is expected to resign. Also, the remaining shareholders will not stand by while the value of their investments is undermined - they will put pressure on the company to change its policies in order to increase share value by attracting back the interest of those shareholders who sold out because they didn't agree with the company's activities.

Ethical investment can also take the form of active shareholding, i.e. continuing to hold shares in unethical companies and using the right as a shareholder to speak out at AGMs (annual general meetings for shareholders) and vote on company policy.

Whether disinvestment or active shareholding is more appropriate will depend on the circumstances surrounding each company.

1. What is clean investment?

Financial decisions are usually based purely on profit, but there is growing support for the idea that we should take responsibility for what's done with our money by the companies we invest in. Clean investment takes into account the ethical implications of investing in companies with persistently poor employment, environmental or human rights records alongside conventional considerations of profit.

2. Isn't that subjective?

Yes. People will disagree about what are unethical or inappropriate investments, but then people disagree about the trade-off between security and profits. There not being only one answer doesn't mean we should ignore the question; it means there needs to be a clear and open decision making process.

3. Are there alternatives to disinvestment?

In many cases disinvestment may be a last resort. Where colleges hold a significant share in an unethical company, they may attempt to improve the company's practices by raising the issue at Annual General Meetings (AGMs) and tabling motions. However, with the most blatantly unethical companies there is little chance of influencing policy at AGMs, and the only option may be disinvestment. The option of active investment should not be used to whitewash inaction.

4. What will it cost?

That depends on the individual decisions the college takes. A policy of active investment would obviously cost nothing, but that may not always be ethically acceptable. There is also strong evidence that the screening of investments in accordance with basic ethical returns can lead to improved returns. 'Which Magazine' said in July 1993 “the average ethical fund has done as well as - and sometimes even better than - the average conventional fund”. The average UK ethical unit trust beat the average of all UK unit trusts by 13% (71% growth compared to 55% growth for the FTSE index) between 1991 and 1996 (source: Cooperative Insurance). The World Markets Company concluded its report on ethical investment by stating that it “can provide competitive returns”.

This makes sense: a company with a poor ethical record may suffer from adverse publicity or a consumer boycott; a company which is only looking for short-term profits is unlikely to be a productive long term investment.

5. Wouldn't it breach the legal obligations of colleges as trusts?

Your college is almost certainly registered as a trust. This means the trustees are legally obliged to make their decisions in the best interests of the college. However, ethical investment does not necessarily mean worse financial returns. Even if it did, this would not cause a legal problem because trustees are also required to further the aims and principles of the college. For a college to invest in the manufacture of weapons for countries which suppress freedom of speech and massacre students clearly conflicts with their aim of furthering education. Similarly, to share in the sale of arms to a country which cannot afford to provide adequate education, seems to be incompatible with the college's belief in the importance of education. It definitely goes against the principles of a leading educational establishment to refuse to even consider the issues.

The Goode Committee on Pension Law Reform concluded that:

“trustees are perfectly entitled to have a policy on ethical investment and to pursue that policy, so long as they treat the interests of the beneficiaries as paramount and the investment policy is consistent with the standards of care and prudence as required by law. This means that trustees are free to avoid certain kinds of prudent investment which they consider the scheme members would regard as objectionable, so long as they make equally advantageous investments elsewhere, and that they are entitled to put funds into investments which they believe the members would regard as desirable, so long as these are proper investments on other grounds.”

6. Will it actually make any difference?

Oxford colleges are prestigious intellectual institutions because they are often at the forefront of political and social developments. This means colleges taking action on these issues, whether through disinvestment or active investment, will have greater ramifications beyond the pure financial impact. Oxford colleges do have large investments however and the financial impact would not be insignificant; as increasing numbers of establishments turn towards ethical investment, the combined impact will become hard for companies to ignore. If this coincides with consumer action it would have a serious effect on general investor confidence, thus forcing the company to act.

7. We don't decide what's done with our money, it's up to our fund manager and the unit trusts.

Your college may well invest through fund managers and the pooled funds of a unit trust. They may use this to try to claim they have no control over, or responsibility for, their money. This simply is not true. Many independent financial advisers and stockbrokers offer advice on ethical investment. Fund investors investing directly in shares can use the Ethical Investment Research Service (EIRIS) to screen companies. Alternatively, ethical funds exist to provide comprehensive ethical investment through unit trusts.

To stop your college dodging the issue in this way, it is important you focus not on specific investments, but on the principal that college's should take responsibility for what is done with their money.

8. Wouldn't it all take a lot of time?

Academics can be very protective of their time and may not look kindly on the idea of yet another committee! However, once ethical guidelines have been established the regular workload of the committee should be fairly light.

There are a number of justifications for the time that is taken:

i) The seriousness of the issue deserves consideration. Just as a lot of college time is put into ensuring the college's financial welfare, time should be put into ensuring the college's ethical welfare.

ii) The college's status will benefit from being seen to provide the academic and intellectual lead in the growing move towards ethical responsibility This contrasts with the negative publicity unethical investments would attract.

iii) If you hassle them enough, it will become easier for them to accept than refuse!

9. Is there any precedent for this?

Yes. The national university lecturers' pension fund (Universities Superannuation Scheme) has agreed to set up an ethics committee in response to pressure from People & Planet. A high profile student campaign at University of East Anglia made the agree to disinvest gradually from their most unethical investments. Oxford colleges disinvested from companies investing in apartheid South Africa.

In the USA, Harvard and Stanford Universities have already transferred a large part of their investments to socially responsible investment, as have the central authorities of the State of California. New York City has its $60 billion pensions scheme invested ethically and actively use their influence at shareholders' meetings to promote environmental and social issues. In the UK, Local councils in Berkshire, London/Croydon, Devon, Hampshire, Lincolnshire, Edinburgh and Merseyside have all changed part of their investments to socially responsible investment.

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