In the second instalment of a five-part series on ethical investment Gary Kleyn considers the methods used when making an ethical investment choice.
THE practices used by ethical fund managers are a good place to start for novice investors who want to put their money behind something they can support ethically.
The typical approaches used by those that vet investments to reflect environmental, social or other non-financial values include negative screening, positive screening, best of sector screening or the use of a socially-responsible overlay that addresses issues related to social responsibilities.
Negative screening is used to avoid investments that a person may not feel comfortable with, or that goes against their values. These often include companies involved in things such as gambling, weapons or pornography.
This has traditionally been the ins-trument used by most ethical funds.
Through this process whole sectors are excluded from the fund.
Controversial technologies such as genetic engineering or embryonic stem cell research have been added to the list more recently.
Positive screening is where the fund actively seeks out sectors and companies in future-orientated industries such as biotechnology, renewable energy and health care, or companies with good environmental and social performance.
These companies, that are seen to make a positive contribution to sustainability or social wellbeing, are actively sought out.
Best of sector screens are applied to select leading firms in every business sector based on environmental and social sustainability performance.
This process has been explained in an investors guide to Ethical & Active Shareholding by James Rose.
In it he states: “ Funds will devise a sector-based scale of ethical behaviour and will select the top company or companies from that sector and weight them accordingly, perhaps mirroring external indexes”.
“A counter-argument to this approach is that companies can still be unethical and be the best in their industry sector.”
More recently, investors and managed funds have taken a more active approach.
By using their voting power they have pushed changes in corporate governance or in the direction taken by the company in which they hold an investment.
For instance, environmental groups such as the Wilderness Society have activated shareholders in banks as well as the Tasmanian forestry group, Gunns Ltd, to push for change.
The Ethical Investment Association benchmark survey states that a form of shareholder action becoming more common is constructive engagement “where-by managed funds are invested along traditional financial lines, but take account of sensitive issues by means of meetings with companies to encourage the adoption of more socially responsible behaviour”.
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