This page is your introduction to EI. If you don't know much about EI, this page should help you get a good grasp of the basic issues, as well as the arguments and supporting evidence for EI.
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What is EI? Edit
- Main article: What is EI
Ethical Investment is simply the screening of an individual's or institution's investments for ethical criteria. This might involve measures like refusing to invest in arms companies, refusing to invest in companies with a history of human rights abuses, or choosing to invest in companies doing positive work in the Majority World.
Why EI? Edit
Ethical investment is untertaken in order to make financial transactions and investments accountable to everyone involved. By accountability, effects can be measured and assesed and then bad effects can be identified and reduced, while good effects and be encouraged. 'Justice', therefore, is the goal fo EI. Moreover, there is more to EI than merely reforming a financial system to attempt to account for other types of longer term or social and environmental costs. For example,in his Rules for Radicals, Alinsky outlines his strategy in organizing, writing,
- "There's another reason for working inside the system. Dostoevsky said that taking a new step is what people fear most. Any revolutionary change must be preceded by a passive, affirmative, non-challenging attitude toward change among the mass of our people. They must feel so frustrated, so defeated, so lost, so futureless in the prevailing system that they are willing to let go of the past and chance the future. This acceptance is the reformation essential to any revolution. To bring on this reformation requires that the organizer work inside the system..."
Thus whether EI 'works' or not in bringing about 'social and environmental justice' is not the only issue. If it increases awarness of the problesm and deepens democratic processes, then it is good for everyone: both the investors and the recipients of investment.
What are the criticisms of EI? Edit
*Marxist: Capitalism has inherent contradictions between labour and capital, and any attempt to resolve these within capitalism are merely reproducing capitalism due to its inherently bourgeoise nature. For example, companies cannot begin to become ethical becasue they necessarily demand short term profit maximisation.
- However, this is a narrow and limited Marxist perception of capitalism that has been partially discredited. Capitalisms exist- it is not a singular entity, and capitalism has succeeded in adapting to new opportunities and threats. Capitalism is not, therefore, inherently independent fo the social structures which constitute it: if the demand for 'ethics' exists, they will be supplied...
*Anarchist: EI is working with the system rather than creating alternatives outside the system. The result will be co-option of any radical agenda and the subversion of the aim of 'social and environmental justice'. Exploitation and class division will become more entrenched as the perception of 'authentic change' is created, while in reality , being disavowed.
- however, the system cannot be ignored and its influences can be channeled in a type of 'discourse'. Structures may exist, but they are all dynamic and adaptive, even 'evolutionary' agents.
*Neoliberal: EI distorts the market and thus produces 'inefficiency' becasue there will be friction between resource allocation and demand
- however, this does not account fot the fact that EI can change what is demanded and how it is demanded. EI can be interepreted as a nuanced demand for an 'ethical product', thus increasign efficiency and reducing market failure.
Where Did the Idea Come From? Edit
Dating back to the nineteenth century, ethical investment’s roots can be found among religious movements including the Quakers and Methodists, whose concerns included issues such as temperance and fair employment conditions. At the beginning of the 1900s, the Methodist Church began investing in the stock market, consciously avoiding companies involved in alcohol and gambling. During the twentieth century, more churches, charities and individuals began to take account of ethical criteria when making investment choices. Alinsky is often credited with laying the foundation for the grassroots political organizing that dominated the 1960s. Later in his life he While his grassroots style took hold in American activism, his call to stock holders to share their power with disenfranchised working poor only began to take hold in U.S. progressive circles in the 1990s, when shareholder actions were organized against American corporations.
Initially America was more advanced in developing the ethical investment ideology- for example in the 60's the activist Saul Alinsky encouraged stockholders in public corporations to lend their votes to "proxies", who would vote at annual stockholders meetings in favor of social justice. Then in 1971 the Pax World Fund was set up which avoided investments associated with the Vietnam War. The apartheid regime in South Africa accelerated the promotion of ethical investment in the 1980s. In 1983 [www.eiris.org/ EIRIS] was established as the UK’s first independent research service in ethical investment. [www.friendsprovident.co.uk/ Friends Provident] launched the UK’s first ethically screened unit trust a year later.
Endowment investment decisions are an expression of universities’ financial values and priorities. Unniversities that own stocks in corporations have shareholder rights and responsibilities, including the right to engage in constructive dialogue with corporate executives as well as to vote and introduce shareholder resolutions, which are included in corporations’ annual proxy statements.
Shareowner resolutions provide a formal process for shareowners to request information and/or policy changes in corporations in which they invest. There are hundreds of shareowner resolutions submitted every year dealing with environmental, social and governance issues.
Are there any precedents of EI by other institutional investors? Edit
Engaged shaerowners represent a broad spectrum of institutional investors. Mutual Funds: In response to an SEC ruling in 2003, all mutual funds and investment managers are now required to have proxy voting policies and to disclose how they vote on each proxy question. Private and Public Pension Funds: These funds have an impressive record as engaged shareholders—not only in voting their proxies, but also, in some cases, by initiating dialogues with corporate managers and by sponsoring shareholder resolutions. Public pension funds that have taken leading roles in introducing shareholder resolutions include those from California, Connecticut, Maine, New Mexico, New York City, New York State, North Carolina, Oregon and Vermont. Private pension funds are governed by the Employee Retirement Income Security Act of 1974 (ERISA). An ERISA interpretive bulletin affirms the rights of fiduciaries to utilize proxy voting and other forms of shareholder engagement to protect the value of their investments: “The fiduciary act of managing plan assets that are shares of corporate stock includes the voting or proxies appurtenant to those shares of stock.” Foundations: Some leading foundations including the Boston Foundation, the Ford Foundation, the Nathan Cummings Foundation and the Rockefeller Brothers Fund have adopted active proxy voting policies. Religious Institutions: The Interfaith Center on Corporate Responsibility (ICCR) is the leading coordinator of shareowner engagement for it 275 faith-based institutional investors. Its members include national denominations, religious communities, pension funds, endowments, hospital corporations, economic development funds and publishing companies. For the 2006 proxy season, ICCR members filed 256 shareholder resolutions.
How are Ethical Criteria Chosen? Edit
Ideally in a consultative, participatory process involving, for example, a survey of the entire student body about options for investing. For details about what actual criteria are possible, see The Choice of Criteria in Ethical Investment
A recent report by Freshfields Bruckhaus Deringer, the world's third largest law firm, emphasizes the importance of environmental, social and governance (ESG) issues to the investment decision-making process. The 2005 report was prepared for the United Nations Environment Programme Finance Initiative. Paul Watchman, Partner at Freshfields Bruckhaus Deringer and senior author of the study, commented: "The report confirms that a number of the perceived limitations on the integration of ESG issues into investment decision-making are illusory. Far from preventing the integration of ESG considerations, the law clearly permits and, in certain circumstances, requires that this be done. This legal interpretation has far-reaching implications for the institutional investment community worldwide."
Who is Doing This? Edit
Just as a few examples:
New York City has $60 billion pension funds invested ethically. Local councils in Britain with EI policies include ones in Devon, Hampshire, London, Croydon, and Edinburgh.
Universities with EI policies either already in place or in the process of being implemented include individual Oxbridge colleges, Edinburgh, York, East Anglia, Stanford and Harvard. the School of Oriental and African Studies in London recently withdrew investments from the arms trade in response to staff pressure.
Companies such as BP now invest in renewable sources of energy because of pressure from their shareholders, and the major pension fund for University academics, the USS, holds £19 billion and employs the most progressive ethical investment policy in Britain.
Is EI Profitable? Edit
This, of course, is a really important question, so let's give it a bit of time here. For a great, but technoical overview, see THE FINANCIAL PERFORMANCE OF ETHICAL INVESTMENT FUNDS.
Some people worry that a restricted universe (that is, restricting the number of possible companies you can invest in) necessarily means a higher risk investment. However, this is currently an area of much academic interest, with a good deal of theory arguing that EI can be just as proftable, if not more profitable, than ordinary investment. There is both theoretical and empirical evidence for this.
As a starting example, the FTSE4Good index is the top 100 UK companies that conform to certain ethical criteria. Since the FTSE4Good index was founded, it has outperformed the FTSE index. Another fine example is the Jupiter Ecology Fund which has grown in value by 135% since its inception.
Some of the reasons why this might be so include the following:
- Reputation: Perceived ethical or unethical behaviour can have an impact on reputation and share price. The 1995 Shell boycott resulting from the company’s attempt to dump its Brent Spar oil platform in the North Sea showed willingness by the consumer to favour companies whose policy it is to respect the environment. Some months later Shell found itself at the centre of international controversy for its operations in Nigeria in relation to that country’s poor human rights record. Pressure from consumers and shareholders concerning these aspects of the company’s business forced it to recognise that “the separation of business from wider society is no longer possible”. The growth in social auditing and the development of programs such as PriceWaterhouseCooper’s Reputation Assurance reflects increasing corporate recognition of this.
- Diversification: At the portfolio level, the use of ethical criteria to define your investment universe means that there will be some degree of reduced diversification. Financial theory shows that portfolio variability or volatility does not reflect the average variability of its components because diversification reduces variability. Brearley and Myers show that even a little diversification can provide a substantial reduction in variability, but that you can get most of this benefit with relatively few stocks. The improvement is slight when the number of stocks in a portfolio is increased beyond 20 or 30. Therefore the diversification effects of selecting stocks from an ethically constrained universe are likely to be very tiny indeed.
- Legislation: Government legislation has a role to play. Fund managers of environmental funds also claim that the companies they select for investment because of their proactive stance on the environment, be that using the latest environmental technology, minimising damage to the environment or operating ‘best practice’, will benefit from future legislation and regulation by being ahead of the game. For other firms environmental legislation can be a burden.
Are there any relevant case studies of successful EI? Edit
Increasingly, both through government legislation and through consumer pressure, companies are being forced to consider their own ethics. Ethical investment especially on a grand and public scale, is a really effective way of letting companies know that their corporate behaviour is not only a moral but also a financial matter for them to consider. So as well as empowering individuals to distance themselves from shady corporate practice, ethical investment has great power as a consumer movement.
Check out the page 'Sharholder Actions' that show what engagement can acheive.
- Case Studies of Engagement Practice:
1) The Subprime Meltdown and SRI: Engage, Avoid, Predict Shareowner activists engaged banks on predatory lending long before the subprime crisis climaxed, and SRI research predicted the meltdown in time to avoid some impacts. http://www.socialfunds.com/news/article.cgi?sfArticleId=2366
Retrieved from "http://ei.wikia.com/wiki/EI_Guide_Notes_Page"
- Here are two examples of how general consumer pressure brought about corporate change:
- Improving access to HIV medication in South Africa: When 39 pharmaceutical companies, the largest being GlaxoSmithKline, took the South African government to court over legislation enabling the use of generic drugs amongst the dramatically rising HIV/AIDS population, investors in GlaxoSmithKline actively opposed them both in public, and in private dialogue. With the notable contribution of the engagement policy of the USS (University Superannuation Scheme, which boasts an impressively progressive Ethical Investment policy), the pharmaceuticals decided to withdraw their case, and allow the life-prolonging medication to become significantly more accessible.
- Stopping the Ilisu dam: The British infrastructure construction company Balfour Beatty planned to build a dam in Kurdish Turkey. It would have displaced up to 78,000 Kurds, destroying their homes and creating a potential environmental disaster. The dam would have also adversely affected the flow of water into Syria and Iraq, which may have had grave political repercussions. And the British government were going to gift £300 million of taxpayers money to the project. The campaign against the project was immense, headed by the Kurdish Human Rights Project. An ethical investment strategy was used, again with the notable contribution of the USS. Shareholders grouped together, and forced Balfour Beatty to pull out of the project, and halt the building of the dam. The campaign defeated: 3 multinationals, 1 Swiss bank, 7 large companies, 1 state, the British government and 7 export credit agencies.