What is ethical investment?

There are four main players in the ethical investment business. First are what we might call the investment institutions. Perhaps the best known of these is a bank, the Co-operative Bank-- "We'll never invest in companies who carelessly pollute"--but there are many others. The Clerical Medical Evergreen Fund Ethical Policy,¹ the Friends Provident Stewardship Fund Ethical Policy,² the Scottish Equitable Ethical Trust Ethical Policy,³ the NPI Global Care Fund Ethical Policy,⁴ and Ethical Financial Limited and its Guide to Socially Responsible Investment ⁵ are just a few examples of institutions, policies and literature in which we find moral terms deployed. "Care", "socially responsible" and "ethical". "Ethical" is the most frequently used.

It is largely a self-awarded title. The institutions describe themselves or their investment plans, their endowment policies, personal pension plans, life-assurance or other investments as "ethical". They may use the term in their advertising. The fact that it is self-awarded is not to say that it is arbitrary. On the contrary, the investments that are termed "ethical" are chosen according to increasingly standardized criteria. So-called ethical investments may rule out alcohol, arms or environmental damage, to name but three from an extremely long overall list.

Some of the institutions explicitly deny that they are being judgmental in this. They do so in two ways. First they point out that they are but providing a service to would-be customer investors, the second group of players, who already have established personal preferences about what they consider moral investments. The investment institution merely puts together packages which suit such preferences. Many such institutions also explain that the information they use to find out which companies and which products to invest in, (this is the third group of players, the companies producing chemicals, arms or whatever), is derived from an information organization, such as EIRIS (Ethical Investment Research Service). The information organizations are the fourth and last major player. Thus NPI states: "The team works closely with the independent company EIRIS which helps in identifying companies which meet the criteria for the Global Care Unit Trust". Scottish Equitable states "We use the independent services of EIRIS to advise on the suitability of shares for ethical investment". Friends Provident "commissions research from the independent EIRIS", and Clerical Medical "subscribes to EIRIS".

Over the years a number of criteria have come to be used to define an investment as ethical. The investment institutions appear to accept them as such, at least conventionally. They certainly use the word "ethical" to describe such investments. EIRIS, for it's part also disclaims any act of judgment. "I should add that EIRIS does nor make ethical judgments on Company Groups (that is producer companies). Our role is to assemble information on which concerned investors may base their own judgments."

The history of how these criteria emerged and who helped them to emerge is not the object of this study, though it might well repay someone's attention. Our interest is in the list as it now stands. A few passing comments might be made however. Some items appear to have a Christian, perhaps Methodist origin such as the frequent emphasis on avoiding investments in alcoholic beverages and gambling, and sometimes pornography. Did pacifism, religious or secular, lead to the standard mention of arms as to be avoided? Others would seem to have a health dimension: such as tobacco. Yet others have been prompted by the environmental movement and the animal rights movement. Yet others-- about employment conditions for example--owe something to affirmative action and Third World activism. It is sometimes said that the growth in Ethical Investment has been spectacular although admittedly from a small baseline. What has been even more spectacular is the growth in the items on the list, the number of criteria.

Who is involved in Ethical Investment and what do they do?

These then are the players, the investment fund companies, the producer companies in which funds are or are not invested, the individual investors, and the information groups which "ethically" audit the producer companies. These last also have another function, so far unmentioned, that they publish their audits. These audits in their hands or subsequent hands can fuel public debate. They may be made use of by the activist shareholder, or consumer groups and other activist groups which wish to influence company policy by activist shareholder voting, consumer boycotts or lobbying through national parliaments and international organizations. What starts as a quasi-private service to individual investors may end as something rather different in the hands of others.

What products and practices are defined as ethical?

Any analysis of the ethical character of EI, (ethical investing), must start with the list of products and processes they define as ethical and unethical. There are three groups. First a heterogeneous group including, as mentioned above, arms, gambling and alcohol. Next, green and animal rights categories. Last, categories to do with conditions of employment. These are further divided into positive or negative: "does the company invest in tobacco?" If yes, then bad. "Does the company do all it can to further environmental sustainability?'' If yes, then good. A further division is according to whether the matter is more or less factual. A company either does or does not produce tobacco. Whether it sustains the environment or produces pornography may require further judgment. Thus, the NPI policy mentioned above will avoid investment in companies which publish, print or distribute newspapers classed by EIRIS sources as pornographic. An environmental questionnaire sent by the Swiss-based Centre Info., another information group, asks, 'Have you signed the Principles of the Coalition for Environmentally Responsible Economics (CERES)?'.⁶ And IRRC, the Investor Responsibility Research Center, a US-based information group, asks, 'Does your company endorse the goals of the South African Council of Churches Code of Corporate Conduct?'.⁷ The assumptions here are, I assume, that these third parties, EIRIS, CERES and the South African Council of Churches, are sound, well informed and ethically sophisticated judges of ethical corporate conduct.

Without anticipating the discussion below, we should start by noting that the list of "ethical" concerns is long and not obviously coherent. There is certainly no one explicit organizing ethical principle or even code of ethics which accounts for the collection of products and processes on the overall list. Of course, not all the advocates and personnel of ethical investment subscribe to the entire list. But what more can we say about the list?

The key terms on an ethical list might include several of the following:

• Armaments
• Tobacco
• Gambling
• Any products, e.g. pharmaceuticals and cosmetics, using animal experimentation
• Any products, e.g. fur, involving 'inhumane' animal use
• Beers, wines and spirits
• Inhumane farming
• Involvement in the nuclear industry
• Investment in countries with unethical regimes (in the past, notably South Africa)
• Failure to promote equal opportunities
• Failure to match First World employment conditions in Third World countries
• Lack of trade union rights
• Inadequate level of giving to charity
• Inadequate level of community involvement
• Political donations
• Unreadiness to disclose information to EI information groups
• Inadequate health and safety record
• Excessive greenhouse gases
• Use of tropical hardwood
• Excessive effluent discharge
• Pesticides
• Advertising complaints
• Mining

It is clear that some of these are products, e.g. alcohol. Others of them are processes or company actions such as the way it employs or the way it uses the environment. While the distinction is not entirely satisfactory, it is important. And. as noted above, the EI people themselves correctly point out that the list can be positive or negative: products or practices to avoid or good products and practices

The way some Ethical Investors trade on the word 'ethical'

Our interest is in one question only. Many EI activists are keen to make sure industry advertising is honest and informative. Is their own self-description honest and informative? How ethical is ethical investment? "Ethical" is not just a term which has become conventional, one which could be replaced by any other such as "the neutral investments of personal preference" or the perhaps "pejorative ideological investments". "Ethical" is a crucial trading term for ethical investors. Replace it with these other descriptions and what is lost is highly significant. Thus the company Ethical Financial uses the word in its name and describes itself as founded on principles of "caring", as promoting "socially responsible investment". EI, say the EI people, is for "concerned" investors.

So the EI companies and activists, with little apparent sense of modesty, describe themselves and their products as ethical, caring, socially responsible, positive and concerned. Generously, some also suggest that their clients will be ethical, caring, socially responsible, positive and concerned. Investors who do not invest in the way described as ethical and companies which make products or engage in practices not on the approved list may sense an implication that they are unethical. Whether they are entitled to draw such an implication is not clear in all cases. But it is more than clear in some. Thus the Ethical Financial company not only brands its own products ethical but explicitly says that "as many as 75 per cent of the top shares may have some 'unethical'" link. Some of them, it continues, abuse the world's natural resources and exploit its people and animals. And exploiting people, if not so much animals and not necessarily resources, is bad behaviour any one's book.

So there you have it. On the one hand morally good investments, on the other morally bad investments. Are those EI people, the investors and companies who do so, justified in awarding themselves this prestigious label of moral goodness and in casting investments and investors which do not follow their ideas as morally bad?

Continued...

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