University of Portsmouth Personal Finance for Accountants (U13763)

1. University of Portsmouth Personal Finance for Accountants (U13763) Lecture 8 Ethical Investments

2. Lecture 8 Ethical Investments • Defining an Ethical Investment Policy • Ethics in Pension Schemes • Ethics in Banking • Islamic Finance

3. Defining an Ethical Investment Policy • Many investment funds invest in unethical companies without investors being aware. This has led to a rise in the popularity of ethical investments where people are placing importance on knowing exactly where their money is being invested.

4. Defining an Ethical Investment Policy • When choosing a savings or investment product you may wish to consider where you money is being invested. Is it being invested in an ethical or socially responsible way? • One of the main reasons that people chose to invest ethically is to be sure that their money is not funding something which they would consider to be wrong such as gambling, pornography or arms.

5. Defining an Ethical Investment Policy • Let us first consider an investment in an individual company, how can we tell how ethical they are? • We can search for information regarding a companies ethics on its website or in it's published literature. Many organisations produce a Corporate Responsibility Report (CRR) this addresses the impact of their activities upon their customers, suppliers, employees, shareholders, communities and other stakeholders, as well as the environment.

6. British Airways • British Airways produces a CRR, here they address their impact on the environment including the noise and emissions from their aircraft. • In this report they have set themselves a range of targets to 'limit aviation's impact on climate change'. An example of one target is a '30% improvement in core aircraft fuel efficiency by 2010'.

7. British American Tobacco • British American Tobacco in their ‘social report’ 2005 state: • ‘We recognise that we have a role in addressing human rights issues that are within our sphere of influence in the countries where we operate. We expect our companies to respect the universally recognised fundamental human rights of all their employees and we support the United Nations Global Compact’s guiding principles on human rights’.

8. Defining an Ethical Investment Policy • The information in the CRR is useful when helping us decide where to invest but remember this has not prepared by an independent body and therefore could be seen as a public relations exercise.

9. Ethical Funds • An ethical fund is where the fund manager will only choose companies that are socially responsible and ethical whilst providing good returns.The fund manager can use negative criteria to select his investments; this is where he actively screens out companies that are considered to be unethical these would include companies whose activities are in the following areas:

10. Ethical Funds • Environmentally damaging practices; • Trading with oppressive regimes and countries with poor human rights records; • Pornography and offensive advertising; • Gambling; • Tobacco and Alcohol production; • Experimenting on animals; • Unsafe products or services • Genetic engineering; and • Weapons.

11. Ethical Funds • Alternatively the fund manager may use positive criteria where he actively seeks out companies that make a positive contribution towards society such as:

12. Ethical Funds • Products and services that are of long term benefit to the community; • Conservation of energy and natural resources; • Environmental improvements and pollution control; • Good relations with customers and suppliers; • High employee welfare standards; • Organic farming and foods; • Strong community records; • A good equal opportunities record; • Respect for human life; and Openness regarding their activities.

13. FTSE4Good • An example of such a fund is the FTSE4Good. • Launched in July 2001, the FTSE4Good index series aimed at those interested in socially responsible investment (SRI). • Companies are regularly added to the indices - which cover the UK, European, US and global markets. They are reviewed every six months by an independent committee.

14. FTSE4Good • To be eligible, businesses must meet specified corporate social responsibility criteria. Those that subsequently under perform are deleted from the index. • Nestlé, for example, has been excluded from the index because of its marketing strategy in marketing breast milk substitutes.

15. FTSE4Good • While many have welcomed the index, as it is the first of its kind, there have been some criticisms. • Friends of the Earth, for example, has questioned the inclusion of some companies, which it says have poor environmental records (Guardian money)

16. FTSE4Good • Attached is the FTSE4Good’s September 2008 review, we can see 36 new companies added to the index and 12 deleted. The primary reason that companies were deleted from the index was that they did not meet the criteria for human rights or for countering bribery. • Do we sacrifice investment returns by investing ethically?

17. FTSE4Good

18. FTSE4Good • FTSE4Good Global Index is tracking very closely to the FTSE world Index and in some months has been out performing it.

19. Ethics in Pension Schemes • In 1999, the Pensions Minister Stephen Timms stated that ‘Ordinary people want to know what is being done with the money invested on their behalf’.

20. Ethics in Pension Schemes • Subsequently the Pensions Act 1995 was amended in July 2000 so that trustees of occupational pension funds were required to state the extent to which social, ethical and environmental considerations where taken into account in the selection of investments.

21. Ethics in Pension Schemes • As a result of this change in legislation the ethical investor can extend their choice of investment to not only include the investments that they make directly but to also include those investments that are made on their behalf i.e. via pension funds

22. Ethics in Banking • Here are some examples of ethical banking products currently in the UK market place: • The Co-operative bank has a range of ethical banking products and promises not to lend your savings to companies involved in activities ranging from weapons manufacturing to child labour.

23. Ethics in Banking • The Ecology Building Society will only give mortgages to people intending to buy energy-efficient homes or looking to build new homes from reclaimed or sustainable materials. • It also looks favourably on people who want to renovate a derelict building, an area which traditional lenders normally shy away from.

24. Islamic Finance • Islamic finance is based on the principals of Islamic law. • This attempts to maximise social welfare by protecting the 5 pillars of Islamic society: faith, life, wealth, intellect and prosperity.

25. Islamic Finance • Islamic investments will therefore exclude any company that do not conform to these objectives. This will bar any companies that are engaged in tobacco, gambling, arms, pork, financial institutions and pornography.

26. Islamic Finance • The overarching principle of Islamic finance is that all forms of interest are forbidden. • The Islamic financial model works on the basis of risk sharing. • Nearly all the traditional retail banking services expected from established high street banks are available in a Sharia compliant format.

27. Islamic Finance • The Islamic Bank of Britain offers a Sharia compliant current account, mortgage and even personal loan. • HSBC offers an Islamic current account and mortgage. • A handful of other banks - including some of the biggest international names and the Middle East's biggest traditional banks - also offer financial products in the UK tailored for Muslims.

28. Seminar Work 1. End of chapter MCQs 2. End of chapter Review Questions Further reading – core text chapter 15