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Focus: SRI: Wheb: A 21st century strategy
Ethical investing has come a long way since it first emerged in the UK in the 1980s. Back then, the onus was on avoidance; people wanted to be sure that their investment funds were 'clean' and did not contain companies with any exposure to armaments, nuclear power, tobacco, animal testing, pornography etc. The lists of no-go areas grew longer and a whole industry developed to check for skeletons in the corporate closet.
But some investors wanted to do more than just avoid companies doing things that they disapproved of. Some wanted to invest in companies that were making a positive contribution to the world. So the socially responsible investment (SRI) movement grew up.
These investments aimed to screen out those companies which were involved in 'unethical' activities, but at the same time to invest positively in those companies which were providing solutions to environmental or social problems; companies involved in recycling, alternative energy, education or healthy eating.
The difficulty was that in the early 1990s there were not many companies which were 'pure plays' on environmental or social protection. If a fund only invested in pure play companies, it would expose itself exclusively to smaller companies and to companies that, in some cases, had rather green (in the wrong sense of the word) management teams running them. So the rules had to be stretched somewhat in order to incorporate larger companies into socially responsible funds and so bring the overall risk rating, relative to the index, down.
Some socially responsible investment funds adopted a 'best in class' policy, whereby they could invest in 'the best' supermarket, bank or even oil company. But where to draw the line? Could one have a 'best in class' tobacco company? A 'best in class' arms manufacturer?
Increasingly complex ratings systems and strategies were devised to justify investing in larger companies. Particularly for those investors managing UK-only funds, the number of genuinely environmentally or socially responsible companies available to them was extremely limited. The FTSE was, and still is, dominated by banks, oil companies, supermarkets and telecommunication shares.
Telecommunications companies were considered acceptable because they helped people to communicate without travelling. Banks were deemed acceptable because without them the economy could not flourish. Oil companies were allowed as long as they were investing something - almost no matter how small - in alternative energy strategies.
It got to the stage where the top-10 holdings of a sample of ethical and SRI funds would nearly all contain Tesco, Royal Bank of Scotland and Vodafone. While none of these companies was directly involved in nuclear power, tobacco, animal testing or pornography, it could not be said that they were solving the world's problems.
At best, they might have been adapting to the challenges of climate change and fair trade by employing a corporate social responsibility department who would then ensure that the company's corporate responsibility was carefully conveyed to investors and other stakeholders - on documents that were printed on recycled paper.
However, in the last decade an exciting development has occurred, which has ushered in a new phase in ethical/socially responsible investment: The science, and indeed the economics, around climate change became ever more compelling.
