Digital Transformation » Systems & Software » Ethical investment – The right-on ranking

Last April Tim Melville-Ross, director general at the Institute ofour exclusive listing reveals. But what do the country’s finance directors think about having ethical investors? Directors, warned business leaders that unless they recognised and dealt with their ethical responsibilities, “business is in danger of losing its licence to operate and failing to deliver growth and prosperity”.

Ethical means different things to different people, but it seems the message is gradually catching on. “Ethical” investments are becoming increasingly popular. Ethical fund managers, financial advisors and research organisations all agree there is rapid growth in this sector. Already they have more than #1bn to play with.

On the back of this, Financial Director launched an investigation of the UK companies which underpin ethical funds’ portfolios. After compiling a lengthy list of companies held by three or more funds from the most recent manager’s reports, we found that Body Shop International, the epitome of 1990s business virtue, is not the UK’s top ethical investment. Three other companies – British Telecom, British Polythene Industries (BPI) and Railtrack – top the list. BT shares are held by 13 of the 30 ethical funds we surveyed, while both BPI and Railtrack are invested in by 12.

Body Shop International ranks joint fourth with privatised utility Wessex Water – each attracting 11 investment funds’ money.

There are two criteria for companies to be invested in by an ethical fund: first, they have to meet specified ethical tests (see page 30); second, they have to be good investments. There are more than 700 UK companies in the funds’ portfolios, but we have only listed those which are found in three or more portfolios, for brevity’s sake (see pages 27 and 28).

Stockbrokers Albert E Sharp is currently setting up an ethical fund in response to existing clients’ requests. Head of ethical fund management Fleur Leach says: “There is definitely more awareness among companies and ethical issues are rising on management’s agenda. For example, Albert E Sharp’s charities department is worth about #250m and these clients increasingly show interest in establishing ethical policies.”

Three years ago financial advisors Bromige & Partners noticed that their clients were asking for ethically-screened investment portfolios, so they set up a broker bond called the Ethical Investment Trust.

Bromige & Partners director Christian Thal-Jantzen also says interest in ethically-screened funds is growing fast. “Many, if not most, of our clients have a concern about where their money is. They get a reasonably good return and make sure that their money is where they want it to be, or not where they don’t want it to be,” he says. “That’s being born out in the unitised ethically screened sector which is by far the fastest growing sector within the financial services industry.”

So, faced with this demand, are UK companies taking steps to make themselves an attractive ethical investment? The truth is that companies’ responses vary from complete neglect of the issues to adopting environmentally-friendly processes and active participation in charitable and community acts.

Surprisingly, perhaps, Manchester United made it on to our list because four ethical funds invest in it. Why? Not only is the club a “clean” business, it plays an active role in its community. For example, it subsidises football courses for kids and put a “six-figure sum” into a local school to improve their facilities.

David Gill, finance director of Manchester United, says it’s good business.

“The critical thing is that football is part of the local community. Although we are a FTSE-250 company now we are very conscious of our roots and the fact that we can help the northwest – and how we relate to the community and make sure we participate in it, support it and give people a lot of opportunities in it. In this game, speaking hypothetically, with our success on the pitch we’re building up goodwill with the community and our supporters.”

Environmental protection as well as employee and community support are part of Scottish Power’s core philosophy. The utility is spending #4m a year to sponsor 300 unemployed youths and employees through a two-year accredited training program. Scottish Power has also spent #28m on its new power plant in Longannet which burns both gas and coal, significantly reducing environmentally-unfriendly emissions.

“In the last two years we launched a very strong values drive,” explains Ian Russell, finance director at Scottish Power. “We are firm believers that if we get the commitment to customers, employees and the environment right, the value to shareholders will follow.”

Russell admits the cost of adopting ethical measures is a strain, but it’s worth it, he says. “It’s easier in the short term to reduce the costs, but that would be to our disadvantage in the medium- to longer-term. Our commitments grow into returns and create more value for shareholders by taking action,” he says.

However, SIG has a very different approach. The building materials merchant, which counts 10 ethical funds as shareholders, has never made any conscious effort to be an attractive ethical investment, according to its finance director Francis Prust.

“Other people regard us as ethical, rather than ourselves. We certainly don’t try to present ourselves as such,” he says. “I don’t know why people really regard us as being ethical. I think it’s simply because we are not involved with tobacco or alcohol or defence equipment that we’ve been given this tag.” The only benefit to being an attractive ethical investment perceived by Prust is, “it doesn’t exclude one from certain funds”.

Perhaps he is being too modest. Several of the 10 funds that invest in SIG have thresholds relating to corporate governance, employment practices and training.

The IoD’s Melville-Ross believes UK businesses have to be more proactive about ethical issues. He has called for a campaign to change business attitudes and promote ethical values, to protect the interests of all stakeholders. “When executives ignore the interests of one group of stakeholders systematically over time, those stakeholders will use the political process to force regulation or legislation that protects themselves,” he said last spring.

In fact, environmental legislation is making the cost of ignoring ethical responsibilities significant. There are stiff penalties for companies which fail to comply with Health and Safety Executive and the Environmental Agency standards. A total of 291 companies were convicted of water pollution violations and fined #1.1m in the past three years, according to the Ethical Investment Research Service (EIRiS). In the same period, there was an additional 231 convictions for health and safety violations and the offenders were fined #2m.

Albert E Sharp’s Leach points out that ethical businesses run a lower risk of some very expensive aspects of company activity. “For example, damaging the environment is a very expensive thing to do now. Ten years ago a company wasn’t necessarily found liable for environmental damage because it wasn’t recognised. Nowadays it is and there’s a bill attached.” she explains. “Also, staff unrest could lead to strikes, litigation, and low productivity, all of which is expensive.” Companies which follow an ethical route can benefit and save themselves money in the long run.

Barry Cosgrove, finance director at Powerscreen International, agrees.

The group has 10 ethical investors, and has an environmental policy and submits to regular environmental audits. But Cosgrove says it all comes down to the bottom line.

“We manufacture machinery for recycling demolition material, reprocessing road surfaces and pre-sorting landfill material,” he explains. “Around 45% of the machinery we make is used in various recycling applications.

It’s economic factors that are driving the use of our machines. The reason we’ve been invested in so highly is because so much of the machinery we manufacture is used for reusing materials.”

The cost to business is not just financial, but one of maintaining a good name. Earlier this year two companies, Shell and Rio Tinto (formerly RTZ), were embarrassingly confronted by shareholders over their environmental and ethical records at their AGMs. Rio Tinto, which is being lobbied by groups such as Friends of the Earth and the World Development Movement (WDM) over human rights issues arising from its mining stakes in third world countries, specifically the Grasberg mine in Indonesia.

WDM is targeting institutional and individual investors with a shareholder action campaign, which aims to raise awareness of what kind of companies their money is funding.

Barry Coates, director of WDM, says the group plans to attend more AGMs: “We are keen to get the message out – not by way of warning companies that we are going to be nasty campaigners – but by saying that ethical issues are real to people and they really do care about how their money is spent. There are surveys which show that when people find out that their money is being spent on arms manufacturers whose goods go to third world dictators, they get upset.”

Indeed, 73% of adults think their pension scheme should operate on an ethical policy, according to a survey of 700 people by EIRiS in October.

EIRiS’s head of client services Karen Eldridge says these costs – both tangible and intangible – are the reason why more companies are making a conscious effort to make themselves an attractive ethical investment.

“Companies are realising that they do have responsibilities to the wider community, not just to the short-term shareholder,” she explains. “They wouldn’t do this for purely altruistic reasons, so it must be good for their financial interests too.”

The Money & Ethics guide to ethical investments is available from EIRiS on (0171) 735 5323.

FTSE-100 Companies that the ethical funds haven’t invested in

3i Group (venture capital)

BAA (trans)

BAT Industries (tobacco)

Billiton (extrac indus)

British Aerospace (engineering)

British Petroleum (oil)

British Steel (engineering)

BTR (div indus)

Energy Group (electricity)

GEC (electronics)

GKN (engineering: vehicles)

ICI (chem)

Ladbroke (leisure)

LucasVarity (engineering: vehicles)

Rank Group (leisure)

Rio Tinto (extrac indus)

Rolls-Royce (engineering)

Royal & SunAlliance (insurance)

Shell Trans & Trading (oil)

Smiths Industries (engineering)

Sun Life & Provincial (life assur)

Thames Water (water)

Tomkins (div indus)

Whitbread (brew, pub & rest)

Note: Certain groups such as Billiton may have listed after fund report date.

See footnote page 28 regarding ethical and investment criteria.