Mesothelioma - a rare form of cancer found in the chest and abdomen - is caused by inhaling asbestos fibres. Most asbestos products have been banned on the grounds they are a source of (fatal) indoor air pollution, but companies that used asbestos in their building products are still facing lawsuits from those suffering past exposure to their products. One such company, CSR Limited - an Australian sugar, aluminium and building products conglomerate - has handled these claims responsibly by providing compensation for current victims and setting aside money for future claims.

A second company, James Hardie Industries - an international building materials firm - has not been so dutiful in facing its liabilities. In fact, Hardie's actions have been described as contemptuous, shameful and morally bankrupt - criticisms not without cause. Unlike CSR, who acknowledge and provide for their asbestos-related liabilities, Hardie attempted to isolate their liabilities by transferring the company's head office to the Netherlands. When advocates talk about the benefits of globalization and the free flow of global capital this is, presumably, not what they have in mind.

Could responsible investment help to prevent this?

The problem for investors is that, ethics aside, Hardie is a profitable investment. But many people don't want their hard-earned savings going to corporate scoundrels or businesses operating in unethical industries. Fortunately, capitalism is dynamic and responsive and bright financiers have come up with a market solution to this problem. Socially responsible investment (SRI) is the process of selecting and allocating capital to companies whose activities are considered ethical. Advocates will tell you that SRI is about receiving investment returns while supporting companies that show evidence of good corporate conduct, like CSR.

First, critics claim that SRI funds do not perform as well as non-SRI funds. Secondly, critics point to the difficulty in defining "ethical".

Easier said than done. Two major criticisms of SRI emerge. First, critics claim that SRI funds do not perform as well as non-SRI funds. Secondly, critics point to the difficulty in defining "ethical." Moreover, there is a belief that most companies have done something that could be considered objectionable - depending on one's point of view.

SRI: pushing ethics into the boardroom

Most SRI funds select stocks by using negative and positive screens. Negative screens filter out companies with exposure to controversial industries, such as gambling, alcohol, tobacco, pornography, uranium mining, and armaments. On the other hand, SRI funds perform positive screens, identifying both companies that posit solutions to social and environmental problems for the future as well as those that exhibit high levels of social and environmental responsibility.

Due to their potential to impact the environment, sectors that come under close scrutiny include healthcare, renewable energy, mass transport, and water and waste management. Aside from stock picking, some fund managers even engage with companies directly to tackle social and environmental issues, publish in-house research and use their voting rights to push a SRI agenda. For example, climate change is one issue where SRI funds exhibit their influence by only investing in companies who support cleaner and more efficient energy systems. This pragmatic approach, it is argued, encourages companies to employ ethical decision-making.

There are a number of studies that suggest that SRI funds do better than average despite their investment limitations.

CSR Limited, for example, uses ethanol as a fuel extender and produces of cost-effective fertilizers from waste materials. The company has also invested millions of dollars in developing a "green electricity" plant at one of its sugar mills. Once completed, this mill will produce approximately 12% of Australia's renewable energy production target. CSR's aluminum business is also becoming increasingly eco-friendly and has a 25% interest in one of the most cost and energy efficient aluminum smelters in the world. CSR's move into renewable energy demonstrates that a company can balance eco-friendly production and the need to return a profit to shareholders.

SRI: confronting the critics

SRI funds strive to identify and invest in environmentally friendly developments. Despite this, critics say SRI funds do not perform as well as non-SRI funds. Instinctively, this line of argument might appeal to some. However, there are a number of studies that suggest that SRI funds do better than average despite their investment limitations. One Australian firm has done a fair amount of research into this area and found that SRI investing leads to above average returns. The researchers concluded that, although not unique, good business practice pervades every aspect of a company and leads to slightly higher returns.

Secondly, critics contend that these ethical funds are not as ethical as some might like them to be. For example, a number of SRI funds have holding in companies that could be considered socially or politically questionable. Monsanto - a biotech company - is an excellent example of how individuals' values and ethics differ.

In the US, it is estimated that as much as 13 percent of total investment funds are managed according to socially responsible principles. In Europe and elsewhere this figure is below four tenths of one percent.

Monsanto is held by nineteen US SRI funds, but has been heavily criticized for its involvement in the development of genetically modified (GM) foods. Depending on where you stand, GM food is either an unsafe "frankenfood" being exploited by greedy biotechnologists, or a great opportunity to increase the quality and quantity of agricultural produce around the world.

Developing a screen that is meaningful and comprehensive is difficult. There are a number of issues, such as nuclear power, divided on political as well as environmental lines. Critics such as William Martello, assistant professor of policy and environment at the University of Calgary, have labeled such procedures as "idiosyncratic ideological filters, not ethical screens." This argument, while highlighting the inevitable subjectivity of any filter, does not invalidate the benefits of SRI funds. So long as an investment does not claim to be something that it's not (i.e. engage in fraud), then investors should be free to choose among funds - providing the invisible ethical hand. What better way to balance differing "ethical" perspectives?

In the US, it is estimated that as much as 13 percent of total investment funds are managed according to socially responsible principles. In Europe and elsewhere this figure is below four tenths of one percent. SRI investments outside the US have struggled to shake these criticisms. Arguments about the incompleteness of ethical screens and under-performance have been difficult to overcome in markets not as mature as those in US. Regardless, neither of these criticisms seem good enough to deny people a choice in how their savings are invested, and if financial muscle can help companies like James Hardie behave a little more like CSR then who would want to deny their legitimacy?




Contributed by Chris Prunty, a freelance writer in Australia. He placed in the 2004 aBetterEarth essay contest. Reprinted with permission from aWorldConnected.

To read another Global Envision article about leveraging investments for the greater good, see An Entrepreneur Tackles the Logistics of Disaster.



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