Being ethically responsible is the right thing to do

Ethical stocks are no longer a negative approach to investing.

Gary Clement for The National
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There was a time when letting your conscience enter into your investing decisions was like bringing a water pistol to a knife fight. There was no place for it, not if you wanted to win.

Back in the 1960s, when the do-gooders first really mobilised against big business, the perception among professional investors was basically: "Show me a man with a Save the Whales sticker on the back of his Chevrolet and I will show you a man who probably will not be able to upgrade to a Cadillac anytime soon."

The hearts of the top investors were dark chambers, filled with napalm, coal and unfiltered cigarette smoke, certainly not hospitable places for cuddly endangered species, organic produce and Joan Baez.

It was not so much that these investors hated the environment or loved war as much as they appreciated the fat dividends that Phillip Morris and Dow Chemical delivered every quarter.

Times have been steadily a- changin' since then and "socially responsible investing" is now one of the buzzwords of the industry. A primary reason is the growing body of research showing that being a do-gooder no longer means lagging behind the rest of the market.

One analyst last year created what he called the Human Impact + Profit (HIP) Index, which proceeded to outperform the S&P 500 by four percentage points in its first year.

A survey of fund managers found that 90 per cent said their socially responsible funds performed just as well as those with traditional allocations, while another determined that responsible investing will reach as high as 20 per cent of global funds under management by 2015. Even Wall Street's evil overlord, Goldman Sachs, is in the game with a fund called the Sustain Portfolio, comprised of companies tackling climate change.

Another reason ethical investing has gone mainstream is that the category is no longer limited to wind farms and manufacturers of cloth nappies, but now includes companies that are leading their sectors in important ways.

Many fund managers tout Google as a green company for its efforts to reduce energy consumption. Not so long ago, BP was a member of the Dow Jones Sustainability Index, although it was forced to relinquish its membership after the oil spill in the Gulf of Mexico tarnished its credibility in environmental circles.

The point is that there are several different ways to identify the investment vehicles that help you do well by doing good.

The old-school way is through screening, both positive and negative. On the positive side, this would mean choosing companies that exist less to make profits than to make positive contributions to society. The criteria could vary, but many target companies with strong environmental practices, safety records and employee relations. A negative screen weeds out industries that are considered sinful or destructive to society by some people, with tobacco companies, weapons manufacturers and gambling conglomerates as examples of the types of stocks that have long been shunned.

A less obvious means of responsible investing is through shareholder advocacy, in which investors push companies to follow policies that match certain objectives, whether that means finding ways for the firm to make less of an environmental impact or altering the company's political activism.

Because of the growth of the sector, there is no shortage of options for investors looking to align their personal beliefs with their finances. Stock picking is one way, although the BP disaster highlights what can happen if a company violates the principles it claims to stand for. In addition, western economies are generally ahead of emerging markets in environmental standards and labour practices, so it can be a challenge to achieve the appropriate diversification.

The vast majority of the big fund companies offer a variety of socially responsible options, everything from equity funds to bond funds of emerging countries with progressive governments.

Friends Provident, the investment firm that is active in the Gulf, was one of the first global companies to create a range of ethical funds and continues to expand what it calls its Stewardship Funds. These vehicles could be a good fit for expats in the UAE.

The key is to read the prospectus closely to discern how the fund chooses its stocks and/or bonds. What may be perfectly acceptable behaviour to one person may be abhorrent to you. It also makes sense to find out what steps the fund takes to keep companies accountable to certain policies.

Other investors, particularly Muslims, may also want to take a look at the growing number of Sharia-compliant funds, which now comprise a US$1 trillion (Dh3.67tn) industry. This ensures that the funds do not own any companies or products that are haram, such as those related to alcohol, pork or gambling.

Sharia-compliant products are open to all investors, but those not familiar with Sharia law should make sure they understand all of the ramifications - such as how Sharia forbids the collecting or paying of interest, which means profits are created through the trade in actual assets.

This allowed many Sharia-compliant funds to sidestep some of the fallout from the financial crisis, but creates a different set of risks.

When it comes to socially responsible investing, there is something for everybody - with no vow of poverty required.