Ethical
Investing
Conscience
with a Cost?
To some, the prospect of investing may conjure
up images of supporting multinationals that force street kids
to churn out designer apparel for pennies a day, chain-smoking
laboratory monkeys running around with gobs of toxic mascara dripping
from their faces, or tobacco executives feeding their shredders
a constant diet of incriminating product research studies. To
a young person, who often times clearly sees the hypocrisies of
business and the "profit at any cost" mentality of some
businesses, an ethical approach to investing money may be of as
great an importance as actual the actual performance itself.
However, one doesn't need to endure a liberal shot
of pepper spray to make a social statement with a clear conscience.
In fact, today a number of mutual funds specialize in investing
in "ethical" or "socially responsible" companies.
Through doing an "ethical screening" of the companies,
which they may buy stock in, ethical funds save you from this
enormous task. Indeed, finding a stock that will give you a reasonable
return on your money can be difficult enough; subjecting each
of these potential stock picks to the further scrutiny of their
ethics or social responsibility can be an even more arduous task.
For example, Boeing may seem acceptable in that it produces commercial
airplanes as well as space and communications systems. But on
closer examination, one of its three major divisions focuses on
the development and production of military aircraft and missiles
(which may not sit so well with your pacifist beliefs).
Now it's unlikely that the world of business will
change overnight because of where you are spreading your investment
dollar. However, you may sleep easier knowing that your dollars
are at work in companies whose ethics and values are harmonious
with yours. But what about returns? To some, the most unethical
thing a company may do is to not make you money! In fact, a 1996
Fortune magazine article called socially conscious investing "a
dumb idea, yielding sub par returns." But are these "ethically
clean" funds tainted by poor performance? Not necessarily!
Does their performance shine?
In fact, some ethical funds have outperformed their
"unpurified" peers. For example, the North American
Ethical Growth Fund in the 10 years ending January 31, 2001 averaged
an annual return of approximately 18% versus 15.6% for all U.S.
Equity Funds. The fund has also ranked in the top 25 funds in
Canada over the past 15 years in the period ending December 31,
2001, with a compound annual return of 12.2%.
Although these results are encouraging, some suggestions
are warranted when pouring your money into this "sanitized"
pool of investments.
To start with, you need to decide what ethics and values are critical:
What sorts of investments are off limits for you? Tobacco burns
you? Mixed feelings on alcohol? Gambling a social evil? (A cynic
may argue that if you were opposed to any form of gambling you
wouldn't be in the stock market in the first place.) Heavy polluters
make you gag?
At the same time, what values of a company are
important to you? Are those companies that treat their employees
well important to you? Are companies that give equal treatment
to women or visible minorities a priority? Are companies that
donate a certain amount of their profits to charities and community
organizations a critical consideration? Knowing this will help
you in your search for a fund.
If you do go the ethical route, there are some
things to keep in mind:
- Remember that values do change. In fact, youth is a time when
we often do form our values (and yes, perhaps toss some of the
values of our parents). Thus the values of an investment that
you have now may not fit with your personal ethics and values
two or three years from now. Perhaps Oprah's beef with beef
has driven you into the vegan lifestyle and your funds' holdings
in the burger flipping business have made you one "McUnhappy"
investor.
- If there are load fees involved, an exit from a fund could
be costly. Therefore, consider what load and/or switching fees
there are (some such as Ethical Funds Inc. are no-load).
- Some funds do not invest in particular industries such as
tobacco, alcohol, armaments, nuclear power, or in companies
that support repressive government regimes. Other ethical funds
will invest in the best companies within a certain sector (best
of sector approach) such as; the best company with a good environmental
record, say, in the oil and gas industry. You thus have to consider;
is a fund that invests in the best socially responsible company
within an industry acceptable or must certain industries be
avoided altogether?
- Many socially responsible funds tend to hold smaller cap stocks,
which are more likely to fit their ethical screen - a screen
which may exclude as much as 25%-50% of companies from investment
consideration. If so the fund, while perhaps having a greater
potential for high returns, may be more volatile than some of
the larger cap funds. A conservative management style may offset
this volatility risk, but it is important to check the investment
objective and type of holdings before investing in a particular
fund.
- Ethics can be subjective. Thus there is no exact standard
to measure ethical. In fact, saying a fund is ethical is a little
like saying your breakfast cereal is "all natural"...what
defines "natural"? Thus it is important to personally
check the investment objectives and parameters of the funds
that you are considering.
- Consider what the policy is for your fund if one of the companies
whose shares it holds commits an ethical faux pas ("Oh,
you mean that was oil spilling out of the back of our tanker?").
Do they immediately "punt the polluter", or simply
not buy any further shares?
Investing with a conscience can't guarantee prosperity
and likely won't save the world overnight. However, with a little
research, you may earn a good return and a little extra sleep
in the process.
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