‘More than money’ ethic fails to deliver

In spite of their fashionable popularity, SRI funds have been disappointing for investors. Roxane McMeeken explains what went wrong.

Ethical investment is not doing so well in Europe. Once tipped to be the next big thing, the US-led fashion for socially responsible investing (SRI) has not taken off quite as expected. But industry practitioners maintain that many investors want to put their money into environmentally-friendly companies with good human rights track records. All that SRI fund managers need to do, say the experts, is spruce up their investment strategies. According to SiRi, an international umbrella group for 12 social research and ratings organisations, the amount of money in European SRI funds is relatively insignificant. The group, whose members include Avanzi SRI Research in Italy and Fundació Ecología y Desarrollo in Spain, found that by June 2001 SRI funds had reached only E15bn. This compares to more than E2000bn of SRI assets in the US. Karina Litvack, director and head of governance and SRI at London-based Isis Asset Management, formed through the merger of Friends Ivory & Sime and Royal & SunAlliance Investments, argues that this figure is misleading. She says it does not capture the “enormous pools” of assets in funds that, while not screening out unethical companies nonetheless take a strong activist stance aimed at changing the behaviour of the companies in which they invest. She believes investors are still keen on SRI and expects interest to increase as a result of the recent corporate accounting scandals. In addition, Isis has identified a “personality type” prone to investing ethically. On the one hand, “you have people who do a job nine to five, then do voluntary work after hours. They don’t ask if their day job is compatible with their weekend work.” On the other, “there are people who go to work, drop off their recycling on the way, ask if the company they work for is ethical and build their career around that. They choose their employer based on more than just the money.” The concerns of the latter personality type are being reflected in the way they invest, Ms Litvack says. Christoph Schweizer, head of product development with responsibility for ethical investments at Pictet Funds in Switzerland, admits that “people have been disappointed with their SRI investments”. Especially those who have invested in Dow Jones Sustainability and FTSE4Good products, he says. But he argues that this disappointment stems not from inherent problems with ethical investing, but rather the fact that most SRI products have been overweight in growth stocks, which have been hit badly in the past two years. Referring to the aforementioned indices, Mr Schweizer says that in addition to their style biases, both lean disproportionately towards UK and Scandinavian companies, and towards large caps. Based on this outlook and in a display of confidence in the future of SRI, Pictet has launched a new ethical product. The Sustainable Equities Europe fund is neutral in terms of value and growth, market cap and country. Mr Schweizer explains that the vehicle’s strategy is to “take each industry and pick the most sustainable companies within it according to our methodology”. The fund invests in every industry Pictet deems to be indispensable. Thus: “as realistic investors we invest in oil. The overall economy needs petroleum. We buy Royal Dutch Shell, which we think is the most sustainable oil company, but Elf Total Fina is not in the portfolio,” says Mr Schweizer. The product excludes tobacco, nuclear power and weapons. Mr Schweizer adds that another cause of the present setback in ethical investing is that until now most SRI products were designed by SRI experts. They analysed companies on purely ethical criteria, he says, such as “are they giving huge donations to charity and do they have an enormous staff pension fund”. He says that now fund managers need to “make the link between ethical behaviour and economics – to ask how SRI is contributing to a company’s wealth”. “Ethical policies should have a long- term sustainable effect. It is the function of companies to make money after all,” he adds. Steven Lydenberg, principal and founder of Domini Social Investments, the New York-based global firm, adds that in order to improve, the SRI industry needs to “develop new quality standards, undertake theoretical research on topics of communal concern and create a network of issue-specific, niche market research firms”. These firms would analyse particularly complicated sets of social and environmental data such as toxic chemicals, bank lending practices, union relations, military contracting information and labour practices of companies operating in developing countries.