ethical investment and focuses on the investment behavior of charities. Charities have been found lacking a clear SRI policy even though the public clearly says it favors the charities that invest ethically.
Ethical Investment and Charities
Ethics and business are now so closely connected that you cannot discuss the latter without referring to the former. This is because most people today believe that ethics should be a part of every business policy and the public has become more conscious of the ethical responsibilities of business houses. This awareness has come from the realization that while all businesses may improve the economic condition of the country and accelerate economic activity, they do not necessarily benefit the society and many are unaware of their responsibility towards the community.
For example, tobacco companies are probably one of the most important economic sources of income for the country. Tobacco sells well and the income it generates goes to benefit the economic activity in the country. The GDP increases and so does employment etc. however this is no longer enough. People are no longer interested in only the money making aspect of businesses, they have become more aware of the impact of such economic activities.
For this reason, while tobacco companies are highly successful, they are not viewed as ethical organizations since their products are harmful to community's health. To improve their image, such companies are trying to invest in the environment etc. But since the very nature of their business deviates from generally accepted ethical practices, people refrain from investing in such firms. And this gives rise to the concept of ethical investment. After its successful start in the United States, the concept is rapidly gaining prominence in the UK and the rest of the Europe as people are now consulting special organizations before investing their money in order to be certain that the funds they invest in are ethical in nature.
In other words, people have become more interested in finding out how their money is utilized. For example, many people invest in investment institutions and do not directly purchase stocks, but now they need to know where these institutions are investing their savings. In other words, people now believe in socially responsible investment. Church and charities are the most closely monitored social bodies because how they invest their money can become a serious issue of concern for the whole nation. Charities and churches therefore consult EIRIS before they invest their money.
The Ethical Investment Research Service ("EIRIS") is the most important organization in the UK that provides services connected with ethical consultancy and monitoring. It scrutinizes the ethical practices of various firms and then makes a list of the most ethical and also fairly profitable firms to invest in. This list is regularly used by charities and churches to ensure their savings are being used for the right purpose by ethics-oriented firms. This firm basically works for the "the growing number of charities and church funds who needed a centralized body to monitor ethical investment because their faiths may exclude certain practices such as drinking alcohol or gambling. The Quaker movement established the first "ethical" unit trust in the UK, the Friends Provident Stewardship fund, in 1984 and it remains one of the leading funds in this arena and one of the strictest in its criteria, or "dark green" in ethical fund terms, and currently one of the top performers in the ethical sector." (Cathy Growney, 2002) EIRIS has developed a sound definition for ethical or socially responsible investment. It says that SRI is "any area of the financial sector where the principles of the investor influence which organization or venture they choose to place their money with, or how the investor uses their power as a shareholder." (Growney, 2002)
Ethical investment model was developed for the purposes of avoiding unethical use of savings. In the UK, ethical investment was institutionalized after it was found that people and charities are seriously concerned about how their money was used by the banks, investment institutions etc. They wanted to remain clear of unethical organizations including those that were involved in the production of arms, tobacco, nuclear power etc. Initially the government and concerned authorities both in the U.S. And UK felt that ethical investment would curtail the rate of investment in the country and ethical funds on the whole would perform poorly. However contrary to this belief, ethical funds are doing better than their unethical counterparts.
Ethical funds include environmental, green and socially responsible funds, which are now the most important and fastest growing, sector in the unit trust industry. They have been a part of the investment industry for past twenty years but it is only now that their importance has been recognized and the credit for this goes to their exceptional performance over the decades. Ethical funds are serve an estimated 469,000 investors in the UK and are worth 7.2 billion Euros. Their good performance and the healthy growth of such organizations have turned them into solid contenders and people are happier making money with a clearer conscience.
Russell Sparkes, fund manager of the Central Finance Board of the Methodist Church told a gathering that charities are now increasingly investing in ethical funds. By 1998, the amount of investment in ethical funds by charity organizations had reached 8 billion Euros. "Even though the investment strategy is based on personal beliefs, ethical investments can provide competitive returns and even have an advantage over more conventional investment approaches, according to research by the Edinburgh-based WM Company. Analyzing the impact of ethical investment on returns, it discovered that competitive returns are achievable but at a cost of some extra volatility. An Ethical Charity Universe, set up for the purpose of the analysis, found that between 1992 and 1995 there was an identical UK equity return to that of unconstrained funds, 15.5 per cent per year, suggesting that the exclusion of certain stocks did not appear to have a major impact." (Bien, 1997)
Alastair MacDougall, research and consulting coordinator at WM Company agrees saying: "We discovered no systematic difference in returns between ethical and non-ethical portfolios. The evidence suggests that ethically constructed portfolios can provide competitive returns. And due to the inherent smaller company bias there could be a performance advantage in the longer term over portfolios using the more conventional investment approaches." (Bien, 1997)
The reason why it is important for charities to invest in ethical funds and avoid some specific firms is grounded in the core purposes of a charity and the fact that the greatest source of money for charities is the community itself. For this reason, community has a right to find out where the charities are investing their money. Secondly, inability to invest ethically can seriously hurt the reputation of the charity. For example in the past few years we have seen people questioning the investing habits and behavior of charities. CAF Research with NOP Solutions conducted a survey to find out how people felt about ethical and socially responsible investment. The results reveals that people are more in favor of charities that invests ethically since they believe that the aims and objectives of the charity should be reflected in its investment behavior. "The results showed that over 30% of the general public believed that charities, above all other organizations, should invest their funds in an ethically responsible way. Sixteen per cent believed that churches should invest ethically, just 3% more than the 13% who believed that companies should invest ethically. By comparison, less than 10% of people believed that individuals should invest ethically. Over 40% of people said that they would prefer to support charities, which invest ethically. A further 14% said that they are only prepared to support charities investing in this way, suggesting that this issue may be a major decider in the future of personal philanthropy." (Ethical Investment)
Guardian on 15 November 2000-, ran this headline, "RSPB investments linked to TotalFina oil spill" On December 6, 1998, The Independent published a similar story saying, " Heart charity invests in tobacco industry" and in 2002, we heard Leukemia Research Fund making some investment blunder of the same nature. Such stories can damage the reputation of the charities and can halter the process of fund collection, which is the most important means of income for charities. Charity should ideally become socially responsible investors. However one report reveals otherwise, " ... according to a recent report, more than half of all UK charities still invest in potentially controversial companies. 'With more than [Pounds sterling] 68bn of assets, of which [Pounds sterling] 47bn is invested in equities and bonds, this sector is big business: any change in its pattern of investments will affect not only the image of a particular charity, but also the interests of some of the country's key industries." (Smith, 2003)
According to a survey conducted by Duncan Green of Just Pensions, Do UK Charities Invest Responsibly? It was found that 60% of all charities in…