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Ethical Mutual Funds

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Ethical Mutual Funds

The idea is simple: a photo of a pre-adolescent girl taking a drag on a cigarette, with the caption, "Not in my portfolio."

The idea is simple: a photo of a pre-adolescent girl taking a drag on a cigarette, with the caption, "Not in my portfolio." It’s an ad for one of many investment companies offering what have come to be known as "socially responsible investments"--in this case, not supporting tobacco. The ad worked for me: I cut it out of the newspaper with the intention of looking into exactly what kind of business my "Big Bank" registered retirement savings plan (RRSP) mutual fund money is really mixed up in.

Socially responsible investments, or "SRIs" have become increasingly popular in the last few years. When an organized investment boycott during the ’80s helped to bring down Apartheid in South Africa, people began to realize the same financial power could be applied to other "unethical" practices. Investment companies caught on too, and now offer many specialized SRIs. Some of the most popular funds promise to avoid things like tobacco, alcohol, gambling, unfair labor and environmental degradation. The ideas is that investors can sleep better knowing their money is not supporting companies that do harm, and is supporting companies that strive to do good.

So who decides what constitutes "harm" and "good?" According to one company offering SRIs, these decisions are made by "the public, our unit-holders and a special advisory council on ethics." The input of these "interested parties" eventually comes together to form what are known as "screens." A screen describes a set of criteria used to filter out the worst companies in a given area of concern (like environmental policies) while identifying the best, or most progressive. In theory, only these "good" companies will benefit from an ethical investor’s money.

Shades of Green?
One SRI fund I looked into has an environmental mandate that goes something like this: they promise not to "do business with companies that cause excessive environmental harm" or any which "manufactures or emits a significant amount of ozone-depleting chemicals." Instead it seeks to invest in companies that "demonstrate a strong commitment to environmental responsibility."

This is where it began to get a little fuzzy for me. How do fund companies define words like "excessive," "significant" and "strong," as used above? Granted, the actual principals forming the screens for such funds are likely far more detailed. Yet I was beginning to see the rather broad scope that SRIs can work within and still be called "responsible."

Another shortcoming in my eyes is that SRI companies often judge businesses in relation to one another, not against strict, exclusionary guidelines. Called the "best of sector" approach, it means that your SRI may be supporting a company that dumps toxins into the Great Lakes because it dumps less toxins than others in its industry sector. This approach may be unacceptable to some ethical investors; however, as one SRI company explains, "eliminating these sectors would make it difficult for portfolio managers to design diversified stock portfolios." What they’re saying is, "Look--if you want us to make you money, you can’t be too choosy!"

There’s also the problem of where to draw the line, or perhaps more accurately, how far down the line to look. For example, do you want to support a bank with excellent marks for labor relations and a superior recycling program, but which is lending money to companies manufacturing weapons or producing harmful pesticides? According to critics of SRIs, such banks are commonly included in so-called "ethical" investment portfolios.

Smoke Screens
Remember that anti-tobacco ad I cut out of the paper? According to one article I came across, the same SRI company who placed that ad spent much of 1997 investing in the top 35 companies on the Toronto Stock Exchange--one of which owns Imperial Tobacco! I was shocked and a little dismayed to learn this. But I also know that in this age of multinational mergers and corporate partnerships, it’s pretty hard to keep track of who’s dealing with whom!

In the end, I still haven’t quite decided where to put my money. It’s not that I think SRI companies are out to fool us; I’m sure they do try hard to direct money to the companies they determine most "worthy" of it. And that’s a lot more than any "Big Bank" is going to do. I believe SRIs have played and do play a role in allowing us to show our support or dissent for very general issues.

Perhaps I was just naive to think SRIs could give me any real control over who will and won’t benefit from my money. I see now that socially responsible investing, if it ever was "pure," isn’t anymore. I wonder if it wouldn’t be just as socially responsible to invest in a small plot of land, protect it from development, avoid chemical pesticides and nail up a "no hunting" sign. Oh yes--and a "no smoking" sign, too.

References:
1. Investment Fund Institute of Canada (IFIC): The national trade association for the Canadian mutual fund industry. They invite consumer questions and feedback. Check out on the web, or phone (416) 363-2158.


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