Where next for SRI?
- 27 March 2012
But whether there is such potential growth in the UK is open to debate. While most funds exclude otherwise well meaning companies operating in "oppressive regimes" – North Korea, Burma, Zimbabwe, Saudi Arabia are just a few examples – many may need to update on oppressive companies operating in well meaning countries.
A 27 storey residence
An essay by Arundhati Roy entitled "How long can the cardinals of corporate gospel buy up our protests? " sets the scene of an India where 100 families own a quarter of the wealth and where the state, ostensibly democratic, crushes protest in the name of economic development. Roy, a novelist, highlights the 27 storey Mumbai property, complete with three helipads and six hundred servants, that represents home for Mukesh Ambani, who with a cool $20bn is one of India's new very rich.
How SRI funds deal with the issues in Roy's writing may either confirm ethical investment as a way forward or leave many cold. And one problem SRI has to deal with is that many funds come from smaller or boutique managers which do not have the same clout to engage positively with companies that huge US pension funds can do.
These management firms also face a second challenge. One of the unintended consequences of the forthcoming Retail Distribution Review (RDR) is the potential to cut off many retail investors from SRI funds, especially from the specialist investment management firms which typically depend on IFA recommendations.
Change brings unintended consequences
Next January, RDR replaces IFA commission with fees for advice. And one result may be a polarisation of the customer base between high net worth individuals who are happy to pay for advice and lower net worth investors who will follow the free recommendations of online ' "execution-only IFAs'" .
That could mean an emphasis on "winners" – funds that have done well in the past or new funds with "star" managers or those investing in flavour of the month sectors.
Neither category favours SRI funds. The vast majority of ethical and environmental funds are slow and steady rather than category killers. After nearly 30 years of evidence, it's clear that the investor decision to go SRI does not lead to glaring out-performance although stocks in SRI portfolios offer long term sustainability and positive green measures.
IFA guidance in the choice
Many typical retail customers need the guidance of an adviser to buy into SRI – they will rarely do it on the basis of performance table toppers or marketing alone.
And that is what Penny Shepherd, the chief executive of the UK Sustainable Investment and Finance Association (UKSIF), fears.
Writing in the Financial Times, she says: "The implementation of the Retail Distribution Review may reduce independent advice on such funds. So there are tremendous opportunities for both innovation and intervention by the broader sustainability and corporate responsibility community."
This might also be time for SRI funds to update how they present themselves. Three decades ago, at the birth of SRI, stocks were screened negatively – so no alcohol, tobacco, armaments, gambling, pornography and, more recently, no animal testing. Some of the "absolute" bans proved difficult so excluding retailers because they sold just a few of the forbidden products turned into a 10 per cent (or similar) turnover limit on harmful sales.
Some funds are also positively screened. SRI fund managers Ecclesiastical describes this as: "Saying ‘yes' to companies whose products and practices are helping to build a safer, cleaner, better world."
The positive attributes are:
· Business practices and ethical conduct - following ethical practices towards customers including maintaining product quality, ethical sources of supply and respecting indigenous peoples
· Community relations – making charitable donations, employing local people, offering work placement schemes
· Corporate governance practices – transparency, anti-bribery and corruption codes, adhering to International Labour Organisation (ILO) regulations on labour and child labour
· Education - providing training and development along with access to education
· Environmental management - supporting biodiversity, managing climate change impact and carbon footprint, water conservation, air pollution and managing waste, recycling and supporting renewable energy
· Healthcare – providing affordable healthcare and access to medicine
· Human rights - supporting basic human rights by adopting the United Nations Universal Declaration of Human Rights (1948)
· Labour relations - promoting health and safety, transparent pay structures, union participation, professional development, employee participation and whistleblower protection
· Urban regeneration - supporting social/affordable housing.
There should be sufficient factors there for SRI investors to get behind Roy and her fellow campaigners and at least cap Ambani's ambition at one 27 storey home.
So how can SRI deal with what Roy would call oppressive companies working in apparently democratic regimes?
Ecclesiastical's answer for China, which has many of the same problems as India, is: "By actively not investing in China, others can retain control and continue to corrupt the system, ignoring the plight of millions of people. That's why opting out altogether may no
longer be a viable solution."
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