Ethical Investment

Warm and fuzzy

Once a fringe activity of the zealously committed or economically illiterate, “ethical” investing – also known as “socially responsible” – has become a growth industry in its own right, and part of the financial mainstream. But in spite of the recent surge in its popularity, ethical investing is hardly new.

In the 19th century, religious movements such as the Quakers and the Methodists counseled their members to avoid investing in firms that mistreated their workers or made a profit from human frailty. When the Methodist Church itself began to invest in the stock market in the early 20th century it explicitly excluded firms involved in alcohol and gambling from its portfolio. The trend grew and in 1971 the Pax World Fund, an American investment vehicle, was established – initially to avoid investing in companies involved with the war in Vietnam. Pax World now has several funds, all using social as well as financial criteria for investment, and all aiming “to challenge corporations to establish and live up to specific standards of social and environmental responsibility”.

The rapid expansion of ethical investing has coincided with the spread of shareholding, especially in countries like America and Britain and the high profile which environmental and human-rights groups now enjoy and the consequently greater awareness of potential investors. A long campaign against investment in apartheid-governed South Africa persuaded many companies – such as Ford and Coca-Cola – to reduce their business interests there, or pull out altogether.

Many remain skeptical about ethical investing. Ostracizing wicked companies does not reform them, these skeptics say. Besides, what is the moral framework? Is a company which produces drugs that save lives a responsible company, even if it does not slash its prices in poor countries as much as some activists would wish? And is testing its products on animals socially responsible or irresponsible?

The fuzziness of the concept remains a problem, even though funds draw up rules for “screening” companies. Fund managers at Bank Sarasin, a private bank and one of the early ethical investors in Switzerland, shun some sectors, including tobacco and nuclear power, when they select companies for responsible investment. Yet they make exceptions: they have invested in oil companies, for instance, even though fossil fuels are seen as dodgy.

And what to make of pornography? A U.S. coalition of family-focused lobby groups wants hotel companies either to purge their rooms of pornographic TV channels or force lonely travelers to make an embarrassing phone call to “opt in” for such services. Marriott, a perennial target, has said its chain of child-friendly Nickelodeon resorts will be launched porn-free.

For hotel groups, securing a slice of the action from sales of pay-per-view porn is tempting. LodgeNet, an entertainment equipment supplier, serves 1.8 million hotel rooms with movies, not all of them “mature-themed”, and made revenues of $486 million in 2007. Its average monthly per room revenue from movies, including mainstream releases, was $15.80 last quarter.

Such companies negotiate master contracts with hotel chains, or strike separate deals with owners, that see them install the equipment for free for 5-7 years. Franchise fees for hotel groups are driven by room bookings, not extras, and the contribution from movie commissions to an hotelier’s bottom line is seldom transparent. How valuable porn is to them may become clear if it survives in the face of adverse publicity, lawsuits and boycotts by anti-porn campaigners.

Could ethical investors tilt the balance? The Timothy Plan, a “biblically-based” mutual fund group, for example, avoids hotels that offer adult content and companies that install the equipment. But, for the moment, such investors lack muscle. U.S. religious mutual funds manage just $11 billion, according to Morningstar, in a multitrillion-dollar industry.

The Social Investment Forum estimates 11% of US funds under management have some social bent. But socially responsible investing already struggles to define its parameters. The trend is towards assessment across a range of environmental, social and governance criteria rather than exclusion of companies or sectors based on one black mark. Climate change, sustainable development and labor relations are weightier than a businessman’s occasional blue movie.