Milton Friedman was of the view that “the business of business is business”. Others before and after him have questioned whether there is a need for business to be involved in social and moral issues.
Milton Friedman was of the view that “the business of business is business”. Others before and after him have questioned whether there is a need for business to be involved in social and moral issues.
This issue is even more topical given the attempt by Pangea Resources to establish a nuclear waste facility in Western Australia.
For an investor, the issue comes down to whether it is possible to follow an ethical investment bias in your portfolio.
One of the issues that investors look at in this regard relates to the performance of funds that have a strong ethical base to their stock selection.
Ultimately, investors will look to the performance of the funds to determine whether the ethical stand that they take is worth their while or not.
How does an investor determine in which fund they should invest?
This question has been addressed recently by Dilek Saticieli of Tower Asset Manage-ment Limited.
Ms Saticieli says that there are basically three types of ethical fund managers.
Positive screen fund managers actively seek to invest in companies whose products or services are of a long-term benefit to the communities in which they operate and/or contribute to a better environment.
Criteria may include a good safety record, openness about activities, control of pollution, production of recycling equipment, equal opportunity policies and energy saving equipment/processes.
Negative screen managers, on the other hand, will exclude investment in companies that are involved in practices excluded by the mandate criteria. This may involve avoiding companies operating in the areas of:
• nuclear power/fuel
• poor human rights and repressive regimes
• arms trade/military contracts
• the tobacco industry
• the gambling industry
• alcohol production and distribution
• animal experimentation
• the meat industry
• CFC production.
‘Best of sector’ managers select an industry and invest in those companies demonstrating better performance within that industry. This type of manager will choose the better performing companies within the IT industry, for example.
A number of the ‘ethical funds’ in Australia utilise the negative screen approach. This offers the investor the most discretion as they can choose the fund and manager that excludes the specific types of stocks that they do not want to invest in.
The biggest difficulty that managers of such ethical funds face is determining how stringent the screening process should be.
The negative screen process could well exclude a company such as WD & HO Wills as being a cigarette manufacturer. However, it may not exclude Coles Myer, the retailer of that same cigarette.
The issue for fund managers is to understand how many iterations investors are looking for them to undertake.
The next issue of importance is delivery of an adequate level of performance without compromising the ethical criteria. In the case of the negative screens, the compromising of any ethical criteria can destroy the original charter of the fund.
At the end of the analysis Ms Saticieli undertook, she came to the view that “investment decisions can have social implications.
“In the long term, the incorporation of social and environmental considerations to investment decisions will have positive impacts on communities,” Ms Saticieli said.
“Companies should employ socially responsible practices if they are to survive the emerging socially responsible business environment.
“Growth in ethical fund investments in Australia will probably continue with greater momentum than in the past as trustees, companies and fund managers recognise the demands of socially aware consumers and investors,” she said.
Interestingly, when you examine the performance of the Tower Ethical Trust against a benchmark such as the All Ordinaries Index the results are quite strong.
Performance to 30 June 1999
1 Year 2 Years 3 Years 4 Years
Tower Australian Equities fund
18.60% 11.82% 18.24% 18.93%
Tower Ethical Equities Fund
18.95% 11.08% 15.64% 17.66%
All Ordinaries Accumulation Index
15.34% 8.28% 14.06% 14.50%
This issue is even more topical given the attempt by Pangea Resources to establish a nuclear waste facility in Western Australia.
For an investor, the issue comes down to whether it is possible to follow an ethical investment bias in your portfolio.
One of the issues that investors look at in this regard relates to the performance of funds that have a strong ethical base to their stock selection.
Ultimately, investors will look to the performance of the funds to determine whether the ethical stand that they take is worth their while or not.
How does an investor determine in which fund they should invest?
This question has been addressed recently by Dilek Saticieli of Tower Asset Manage-ment Limited.
Ms Saticieli says that there are basically three types of ethical fund managers.
Positive screen fund managers actively seek to invest in companies whose products or services are of a long-term benefit to the communities in which they operate and/or contribute to a better environment.
Criteria may include a good safety record, openness about activities, control of pollution, production of recycling equipment, equal opportunity policies and energy saving equipment/processes.
Negative screen managers, on the other hand, will exclude investment in companies that are involved in practices excluded by the mandate criteria. This may involve avoiding companies operating in the areas of:
• nuclear power/fuel
• poor human rights and repressive regimes
• arms trade/military contracts
• the tobacco industry
• the gambling industry
• alcohol production and distribution
• animal experimentation
• the meat industry
• CFC production.
‘Best of sector’ managers select an industry and invest in those companies demonstrating better performance within that industry. This type of manager will choose the better performing companies within the IT industry, for example.
A number of the ‘ethical funds’ in Australia utilise the negative screen approach. This offers the investor the most discretion as they can choose the fund and manager that excludes the specific types of stocks that they do not want to invest in.
The biggest difficulty that managers of such ethical funds face is determining how stringent the screening process should be.
The negative screen process could well exclude a company such as WD & HO Wills as being a cigarette manufacturer. However, it may not exclude Coles Myer, the retailer of that same cigarette.
The issue for fund managers is to understand how many iterations investors are looking for them to undertake.
The next issue of importance is delivery of an adequate level of performance without compromising the ethical criteria. In the case of the negative screens, the compromising of any ethical criteria can destroy the original charter of the fund.
At the end of the analysis Ms Saticieli undertook, she came to the view that “investment decisions can have social implications.
“In the long term, the incorporation of social and environmental considerations to investment decisions will have positive impacts on communities,” Ms Saticieli said.
“Companies should employ socially responsible practices if they are to survive the emerging socially responsible business environment.
“Growth in ethical fund investments in Australia will probably continue with greater momentum than in the past as trustees, companies and fund managers recognise the demands of socially aware consumers and investors,” she said.
Interestingly, when you examine the performance of the Tower Ethical Trust against a benchmark such as the All Ordinaries Index the results are quite strong.
Performance to 30 June 1999
1 Year 2 Years 3 Years 4 Years
Tower Australian Equities fund
18.60% 11.82% 18.24% 18.93%
Tower Ethical Equities Fund
18.95% 11.08% 15.64% 17.66%
All Ordinaries Accumulation Index
15.34% 8.28% 14.06% 14.50%
