Ethical Investment and Socially Responsible Investment (SRI) Guide

The origins of Ethical Investment and Socially Responsible Investment (SRI)

The origins of SRI may date back to the Religious Society of Friends (Quakers). In 1758, the Quaker Philadelphia Yearly Meeting prohibited members from participating in the slave trade-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 Methodism. Wesley’s sermon “The Use of Money” outlined his basic principles of social investing, i.e. not to harm your neighbour through your business practices and to avoid industries like tanning and chemical production, which can harm the health of workers.

Some of the most well known applications of socially responsible investing were religiously motivated. Investors would avoid ‘sinful’ companies, such as those associated with products like guns, alcohol and tobacco.

Modern socially responsible investing

The modern socially responsible investing movement evolved with the political climate of the 1960s. Economic development projects started or managed by Dr. Martin Luther King, like the Montgomery Bus Boycott and the Operation Breadbasket Project in Chicago, established the model for future socially responsible investing efforts. King combined ongoing dialogue with boycotts and direct action targeting specific corporations.

Dr. Martin Luther King. Courtesy of the U.S. National Archives via the pingnews photo service.

Concerns about the Vietnam War were incorporated by some early social investors. Many people living during the era remember a picture in June 1972 of a naked nine year-old girl, Phan Thi Kim Phúc, running towards a photographer screaming, her back burning from the napalm dropped on her village. The photograph channelled outrage against Dow Chemical, the manufacturer of napalm, and prompted protests across the country against Dow Chemical and other companies profiting from the Vietnam War.

During this time, social investors increasingly sought to address equality for women, civil rights, and labour-management issues. In the late 70s, SRI activism gave increasing attention to nuclear power and automobile emissions control.

During the 50s and 60s in the US, trade unions deployed multi-employer pension fund monies for targeted investments. The United Mine Workers fund invested in medical facilities, for example, and the International Ladies’ Garment Workers’ Union (ILGWU) and International Brotherhood of Electrical Workers (IBEW) financed union-built housing projects. Labour unions also sought to leverage pension stocks for shareholder activism on proxy fights and shareholder resolutions.

In 1978, SRI efforts by pension funds were spurred by The North will Rise Again: Pensions, Politics, and Power in the 1980s and the subsequent organizing efforts of authors Jeremy Rifkin and Randy Barber. By 1980, presidential candidates Jimmy Carter, Ronald Reagan and Jerry Brown advocated some type of social orientation for pension investments.

South Africa

From the 70s to the early 90s, large institutions avoided investment in South Africa under apartheid:

• International opposition to apartheid strengthened after the 1960 Sharpeville massacre.
• 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. 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 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.

SRI beginnings in the UK

In the early 70s plans were devised to launch an SRI retail fund open to UK private investors, although ethical investment had been carried out by UK church-related investment bodies since at least 1948.

In 1984 Charles Jacob obtained regulatory approval to establish an “ethical unit trust” which went on to be launched by the insurance and investment group Friends Provident. At the time City observers were extremely pessimistic about the future of funds which excluded certain types of corporate activity from their portfolios. It should also be noted that the funds original investment mandate included both positive aspirational values and negative exclusion criteria.

Negative Criteria currently applied by Friends Provident Stewardship Fund:

• Tobacco production
• Alcohol production
• Gambling
• Pornography or violent material
• Manufacture or sale of weapons
• Unnecessary exploitation of animals
• Nuclear power generation
• Poor environmental practices
• Human rights abuses
• Poor relations with employees, customers or suppliers

As of December 2007, the total invested in Socially Responsible Investment funds open to private investors reached £8.9 billion, according to figures from the Ethical Investment Research Service (EIRIS). The number of investment funds which operate ethical investment or SRI criteria has also expanded considerably, with over 90 investment funds now incorporating some degree of screening into their investment processes (EIRIS Foundation 2009).

Sustainable and environmental investments

Since 1984 there has been a marked shift in emphasis within the ethical investment/socially responsible investment industry as the main exponents have sought to respond to the opportunities presented by the growing concerns over carbon emmissions reductions and environmental protection.

Whilst there are still a good number of excellent funds which operate on an, “exclusion” basis, screening out morally problematic activities, most of the recent activity in the sector has come from fund managers offering sustainable and environmental investments. There is also much greater emphasis upon engagement activity, whereby organisations running ethical or screened investment funds seek to enter into dialogue with companies in order to push for improved social and environmental practises.

As of 3 July 2000, new legislation in the UK obliged all UK private sector pension funds to consider SRI and voting rights issues as part of their overall investment philosophy. To many within the industry this moment is regarded as something of a landmark in the development of ethical investment simply because of the huge value of capital managed through pension funds.

The Emergence of Sustainable Investing

Reproduced with kind permission from Nick Robins and Earthscan publishing.

It is said that it takes a generation for a potent idea to become common practice. In the case of sustainable development it is now two decades since the Brundtland Commission first launched the concept onto the global stage, calling for a new pattern of economic growth that “meets the needs of the present without compromising the ability of future generations to meet their own needs” (WCED, 1987). This poetically simple phrase contained within it three simple ideas which challenged the prevailing model of economic performance: first, the identification of ecological constraints that human activity must respect (ecology); second, the concept of needs, particularly those of the poorest, to whom “utmost priority must be given” in the commissions words (equity); and third, the principle of intergenerational justice, adding a time dimension to the delivery of development so that long-term durability is not compromised by short-term speculation (futurity).

Looking back, the birth of sustainability was timely, coming as it did in the year that analysts believe the global economy first entered a state of ecological debt – whereby resource extraction and pollution exceed the carrying capacity of the planet, a deficit which has only deepened in succeeding years (WWF 2007).

Investment provides a potential bridge between an unsustainable present and a sustainable future – placing finance squarely at the heart of solutions to issues such as climate change and human rights. Across all of sustainability’s three pillars of ecology, equity and futurity, the need for investment strategies which serve this transition is increasingly evident. Put simply, the world’s capital markets fail to tell the ecological truth by masking the environmental and social consequences of economic growth. Sustainable investing expresses a convergence of forces, bringing together those in the financial sector committed to sustainability along with those happy to ride the investment opportunity.

The Styles of SRI and Ethical Investment

Source: US SIF (2008)

Ethical ‘negative’ screening

Avoidance on moral or religious grounds

Environmental/social ‘negative’ screening

Avoiding companies for involvement in environmentally or socially damaging sectors or policies

Positive screening

Active inclusion of companies due to environmental or social reasons

Community and social investing

Allocation of capital to enterprise that explicitly create a social return

Extra-financial ‘best in class’

Active inclusion of companies that lead in their sector in environmental or social performance

Financially weighted ‘best in class’

Active inclusion of companies that outperform sector peers on financially material environmental and social criteria

Sustainability themes

Active selection of companies on basis of investment opportunities driven by sustainability factors such as renewable energy

Constructive engagement

Dialogue between investors and company management on SRI

Shareholder activism

Use of shareholder rights to pressure companies to change environmental or social practices

Integrated analysis

Active inclusion of environmental and social factors with conventional fund management

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Notes:

• The section headed ’The Emergence of Sustainable Investing‘ has been reproduced with the kind permission of Nick Robbins from the book Sustainable Investing, co-edited with Cary Kronsinsky.

Further reading

• For readers who would like a more technical introduction to this subject, an excellent place to start would be Sustainable Investment – the Art of Long-Term Performance, edited by Nick Robins and Cary Krosinsky, published by Earthscan. Contact our head office for details of a promotional offer!
• Socially Responsible Investment – A Global Revolution, Russell Sparkes – WILEY.
• The SRI Advantage – why socially responsible investing has outperformed financially, Peter Camejo.