Value That Goes Beyond the Bottom Line

Shareholders Increasingly Insist on Ethics

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DETROIT, Michigan, MAY 21, 2005 ( Investing in the stock market does not mean forgetting about ethical principles, as the example of some mutual funds demonstrates. A profile by the Detroit News on May 10 of Ave Maria Mutual Funds described the success of this approach.

Founded four years ago, Ave Maria has grown to a company that manages four funds, including one launched this earlier this month. Overall, the funds have assets totaling around $300 million. In the period since Ave Maria started investing, all its funds have obtained higher returns than the Standard & Poor’s 500 Index.

The Ave Maria Web site explains that its funds «are designed specifically for morally responsible investors who are looking for financially sound investments in companies that do not violate the core teachings of the Catholic Church.»

Furthermore, it explains that the funds «take a pro-family approach to investing.» This involves examining companies on issues such as abortion, pornography, and policies that undermine the sacrament of marriage. The Detroit News noted that the funds dropped their investment in PepsiCo last year after the soft-drink maker started providing health-care coverage to unmarried couples, including gay and lesbian partnerships.

In Canada, meanwhile, investments made according to «socially responsible guidelines» are also increasingly popular. Assets invested using social or environmental criteria rose by 27% to $65.46 billion Canadian ($51.8 billion US) in 2004 from 2002, according to a report by the Social Investment Organization. The report was cited by the Globe and Mail newspaper May 6.

A wide variety

Ethical investing, or socially responsible investment (SRI) as it is termed by many, can use a variety of criteria. There are specifically Catholic funds, such as Ave Maria, or funds that exclude companies involved in activities such as tobacco, alcohol and armaments.

The New York Times on May 1 noted that there are Muslim funds that exclude financial services companies because they lend with interest. There are also single-issue funds, such as the Sierra Club and Portfolio 21, which concentrate on the environment. Other funds use what the article termed a «best-in-class approach.» Instead of eliminating an entire industry sector, the fund invests in the most acceptable companies in the sector.

Some of the funds have come in for criticism, the Times noted, because they are insufficiently strict in their criteria. The newspaper cited a report by Paul Hawken, of the Natural Capital Institute in San Francisco, which was critical of many funds for being too indiscriminating in their investments.

Last Nov. 15 the Christian Science Monitor also reported on Hawken’s criticisms of «ethical funds.» A study published in October by the Natural Capital Institute showed that the funds own shares in 90% of the firms on the Fortune 500 list.

But both the Monitor and the Times noted that the issue of deciding how to invest is complicated. As well, a lot depends on how each fund applies the ethical principles they follow.

«We would like to have neat little boxes that all the funds could fit into,» said Anita Green, vice president for social research at Pax World Funds. «So far we haven’t found a method that will do it,» she told the New York Times.

The Times article also cited Amy Domini, founder of the Domini Social Equity Fund. This fund, along with others managed by Domini Social Investments, currently manages over $1.8 billion, according to the Domini Web site. Domini, noted the Times article, invests in companies such as McDonald’s. Replying to those who criticize investing in the fast-food industry, Amy Domini told the newspaper that McDonald’s had made some changes, such as using napkins made of recycled paper and avoiding antibiotics in beef.

The Monitor article cited Garvin Jabusch, director of the Sierra Club fund family. The funds, he explained avoids risky investments «that are long on ideals and short on track records.» Instead of excluding every company that may not be 100% acceptable, they prefer to concentrate on major corporations that make consistent improvements in their business practices.

The article noted, however, that more than 600 funds worldwide claim the SRI label, and investors cannot always be sure what it means, since the definitions used by the funds vary widely.

And sometimes the funds do decide to sell stocks, even those that are giving good returns, when they see that the companies are no longer acceptable. An article April 14 in the British newspaper The Guardian described how Pax World Funds decided to sell its stocks in Starbucks, following the firm’s decision to introduce a coffee-based liqueur. Pax World Funds, described by the Guardian as one of the first SRI funds in the United States, excludes companies involved in alcohol, gambling, tobacco products, arms production, pornography and nuclear power.

Pressuring companies

The article also raised the point as to whether such funds can really have much influence on company policy. In the case of Starbucks, the decision by Pax World Funds to sell $23.4 million worth of stocks is not likely to have much impact on a company with a current market value in excess of $20 billion.

Yet, excluding investments according to ethical criteria is only part of the picture. Another way to have an impact is by exercising voting rights as shareholders. The Guardian noted that ethical investors in the United States have already filed 200 resolutions on social and environmental issues in the run-up to the spring 2005 annual-meetings.

Reuters described this activity in a May 2 article. The article reported on some of the activities of the New York-based Interfaith Center on Corporate Responsibility (ICCR). The organization filed 264 shareholder resolutions this year, an almost fourfold increase from 20 years ago.

The ICCR Web site describes the organization as «an association of 275 faith-based institutional investors.» The members pressure companies «to be socially and environmentally responsible.» The combined portfolio value of ICCR’s member organizations, reported the Web site, is estimated to be $110 billion.

The ICCR annual report for 2003-2004 notes a wide variety of issues that the organization is grappling with, from corporate governance to global warming, financial speculation, human rights and violence in video games.

Moral principles

Such a range of issues will understandably give rise to a gamut of opinions. Nevertheless, the underlying point — that investors should pay attention to ethical principles when deciding where their money should go — is growing in importance.

As the Compendium of the Social Doctrine of the Church explains, Catholic social teaching values the role of business and the market economy (Nos. 334-5). The Compendium also defends the role of financial markets, observing that the large investments needed in a modern economy would not be possible without capital markets that can direct savings to help economic development (No. 368).

But the Compendium also notes that businesses are occupying a wider role and taking on greater responsibilities in today’s economy. «Due to the increasing complexity of business activities, decisions made by companies produce a number of very significant interrelated effects, both in the economic and social spheres» (No. 344).

This brings with it, the text continues, a responsibility on the part of businessmen for an increased reflection on the moral issues involved in their activity. The general public also have a role to play, the Compendium adds, by deciding where to place their financial resources. This means making a value judgment regarding possible investments (No. 358).

The decision of where to place funds is always a moral and cultural choice, says the Compendium, citing John Paul II’s encyclical «C
entesimus Annus.» A point that is meeting increasing acceptance among investors.

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