Ethical Investment and Socially Responsible Investment (SRI)

The origins of Socially Responsible Investment (SRI) and Ethical Investment

Barchester Green Investment Ltd launched in 1985 as the UKs first ethical and environmental investment specialist (Independent Financial Adviser) IFA today we are almost certainly the largest of the UKs IFA firms working in this area. In July 2009 we restructured the business as an adviser and employee owned Partnership with a commitment to donate a fixed percentage of annual profits to Charities and Social Enterprise businesses.

This short guide provides a brief historical overview of the development of ethical and socially responsible investment or SRI. For readers who would like a more technical introduction to the subject an excellent place to start would be “Sustainable Investment- the Art of Long-Term Performance” edited by Nick Robins and Cary Krosinsky, published by Earthscan- contact Barchester Green Investment head office for details of a promotional offer!

Towards a simple definition: “..the basic meaning is an investment philosophy that combines social and environmental objectives with financial objectives”. from Russell Sparkes “Socially Responsible Investment – a Global Revolution”.

The origins of socially responsible investing (SRI) may date back to the Religious Society of Friends (Quakers). In 1758, the Quaker Philadelphia Yearly Meeting prohibited members from participating in the slave trade-buying or selling humans.

Religious institutions have been at the forefront of social investing ever since. One of the most articulate early adopters of SRI was John Wesley (1703 – 1791), one of the founders of Methodism. Wesley’s sermon “The Use of Money” outlined his basic principles of social investing i.e. not to harm your neighbour through your business practices and to avoid industries like tanning and chemical production, which can harm the health of workers. Some of the most well known applications of socially responsible investing were religiously motivated. Investors would avoid “sinful” companies, such as those associated with products such as guns, alcohol and tobacco.

The modern socially responsible investing movement evolved with the political climate of the 1960s. Economic development projects started or managed by Dr. Martin Luther King, like the Montgomery Bus Boycott and the Operation Breadbasket Project in Chicago, established the model for future socially responsible investing efforts. King combined ongoing dialogue with boycotts and direct action targeting specific corporations. Concerns about the Vietnam War were incorporated by some early social investors. Many people living during the era remember a picture in June 1972 of a naked nine year-old girl, Phan Thi Kim Phúc, running towards a photographer screaming, her back burning from the napalm dropped on her village. That photograph channeled outrage against Dow Chemical, the manufacturer of napalm, and prompted protests across the country against Dow Chemical and other companies profiting from the Vietnam War.

During this time, social investors increasingly sought to address equality for women, civil rights, and labor-management issues. In the late 1970s, SRI activism gave increasing attention to nuclear power and automobile emissions control.

During the 1950s and 1960s, in the US, trade unions deployed multi-employer pension fund monies for targeted investments. The United Mine Workers fund invested in medical facilities, for example, and the International Ladies’ Garment Workers’ Union (ILGWU) and International Brotherhood of Electrical Workers (IBEW) financed union-built housing projects. Labor unions also sought to leverage pension stocks for shareholder activism on proxy fights and shareholder resolutions. In 1978, SRI efforts by pension funds was spurred by The North will Rise Again: Pensions, Politics, and Power in the 1980s and the subsequent organizing efforts of authors Jeremy Rifkin and Randy Barber. By 1980, presidential candidates Jimmy Carter, Ronald Reagan and Jerry Brown advocated some type of social orientation for pension investments.

From the 1970s to the early 1990s, large institutions avoided investment in South Africa under apartheid. International opposition to apartheid strengthened after the 1960 Sharpeville massacre. In 1976 the United Nations imposed a mandatory arms embargo against South Africa. In 1971, Reverend Leon Sullivan (at the time a board member for General Motors) drafted a code of conduct for practicing business in South Africa which became known as the Sullivan Principles. Reports documenting the application of the Sullivan Principles discovered that US companies were not attempting to lessen discrimination within South Africa. Because of these reports and mounting political pressure; cities, states, colleges, faith-based groups and pension funds throughout the United States began divesting from companies operating in South Africa. The subsequent negative flow of investment dollars eventually forced a group of businesses, representing 75% of South African employers, to draft a charter calling for an end to apartheid. While the SRI efforts alone didn’t bring an end to apartheid, it did focus persuasive international pressure on the South African business community.

SRI beginnings in the UK

In the early 1970s plans were devised to launch an SRI retail fund open to UK private investors, although ethical investment had been carried out by UK church related investment bodies since at least 1948.

In 1984 Charles Jacob obtained regulatory approval to establish an “ethical unit trust” which went on to be launched by the insurance and investment group Friends Provident (see Fig1 for the current exclusion criteria), at the time City observers were extremely pessimistic about the future of funds which excluded certain types of corporate activity from their portfolios. It should also be noted that the funds original investment mandate included both positive aspirational values and negative exclusion criteria.

As of December 2007 the total invested in Socially Responsible Investment funds open to private investors reached £8.9 billion according to figures from the Ethical Investment Research Service (EIRIS). The number of investment fund which operate ethical investment or SRI criteria has also expanded considerably with over 90 investments funds now incorporating some degree of screening into their investment processes (EIRIS Foundation 2009).

Since 1984 there has been a marked shift in emphasis within the ethical investment/socially responsible investment industry as the main exponents have sought to respond to the opportunities presented by the growing concerns over carbon emmissions reductions and environmental protection.

Whilst there are still a good number of excellent funds which operate on an, “exclusion” basis, screening out morally problematic activities, most of the recent activity in the sector has come from fund managers offering sustainable and environmental investments. There is also much greater emphasis upon engagement activity, whereby organisations running ethical or screened investment funds seek to enter into dialogue with companies in order to push for improved social and environmental practises.

As of 3 July 2000 new legislation in the UK obliged all UK private sector pension funds to consider SRI and voting rights issues as part of their overall investment philosophy. To many within the industry this moment is regarded as something of a landmark in the development of ethical investment simply because of the huge value of capital managed through pension funds.

The Emergence of Sustainable Investing – reproduced with kind permission from Nick Robins and Earthscan publishing

It is said that it takes a generation for a potent idea to become common practice. In the case of sustainable development it is now two decades since the Brundtland Commission first launched the concept onto the global stage, calling for a new pattern of economic growth that “meets the needs of the present without compromising the ability of future generations to meet their own needs” (WCED, 1987). This poetically simple phrase contained within it three simple ideas which challenged the prevailing model of economic performance: first the identification of ecological constraints that human activity must respect (ecology); second, the concept of needs, particularly those of the poorest, to whom “utmost priority must be given” in the commissions words (equity); and third the principle of intergenerational justice, adding a time dimension to the delivery of development so that long-term durability is not compromised by short-term speculation (futurity).

Looking back, the birth of sustainability was timely, coming as it did in the year that analysts believe the global economy first entered a state of ecological debt – whereby resource extraction and pollution exceed the carrying capacity of the planet, a deficit which has only deepened in succeeding years (WWF 2007).

Investment provides a potential bridge between an unsustainable present and a sustainable future – placing finance squarely at the heart of solutions to issues such as climate change and human rights. Across all of sustainability’s three pillars of ecology, equity and futurity, the need for investment strategies which serve this transition is increasingly evident. Put simply, the world’s capital markets fail to tell the ecological truth by masking the environmental and social consequences of economic growth. Sustainable investing expresses a convergence of forces, bringing together those in the financial sector committed to sustainability along with those happy to ride the investment opportunity.

John Ditchfield, April 2009

Table 1.1 The Styles of SRI and Ethical Investent Source; US SIF (2008)

Notes:

The section headed “The Emergence of Sustainable Investing” has been reproduced with the kind permission of Nick Robbins from the book “Sustainable Investing” co-edited with Cary Kronsinsky. Further reading – “Socially Responsible Investment – A Global Revolution” Russell Sparkes – WILEY “Sustainable Investment – The Art of Long-Term Performance Edited by Cary Krosinsky and Nick Robins – earthscan “The SRI Advantage – why socially responsible investing has outperformed financially” Peter Camejo