Investors use an ethical investment code to align financial investments with personal or corporate moral beliefs. For example, a health charity may choose to have an ethical investment policy that disallows any investment in companies or funds where returns are generated from tobacco production or sales.
Investment in socially responsible funds is a growing business in the financial markets, with the Social Investment Forum reporting that between 1995 and 2007, these funds invested nearly US$3 trillion. Responsible investing should be part of a corporate social responsibility initiative for major investment houses to offer, or at the very least, some alternatives to regular funds.
Determining Ethical Investment Priorities
Organisations wishing to implement said policy should start by determining the organisation’s moral investment priorities. Two major ways to determine the framework of an ethical investment policy are positive screening and negative screening.
In a recent survey conducted by CFDG and EIRIS of charities, over 85% of respondents used negative screening as a tool to determine ethical investment options.
Negative Screening – Avoids Association With Companies or Issues
Negative screening is the process of analysing and assessing the behaviours, products, and community engagement of potential investment vehicles, whether they are companies, industries, or mutual funds. Organisations implementing ethical investment policies based on negative screening consider the impacts of the possible investment vehicle across a range of corporate outcomes. A short checklist of issues to consider when implementing a negative screening approach includes:
- Animal testing
- Environmental practices
- Human rights
- Military Involvement
- Nuclear power
- Genetic modification
Determining ethical investment priorities is a highly personal process; each ethical investment policy will contain different determinations and guidelines for investment. For example, Company A may oppose tobacco but not against animal testing and consider investing in companies or funds that derive returns from pharmaceutical companies. Company B may be against tobacco and animal testing and refuse to participate in any investment vehicle directly or indirectly associated with either.
Positive Screening – Investing In Companies Committed To Social Responsibility
The other major way to determine the framework for an ethical investment policy is to use positive screening. Rather than eliminating companies from the potential investment pool because of perceived harm, positive screening rewards companies committed to socially responsible business practices.
By implementing socially responsible business practices, a company accepts that it is part of a wider community and behaves in ways that support society. This can be through decreasing environmental emissions, contributing to community development projects, and ensuring the human rights of all workers.
Writing An Ethical Investment Policy
After the groundwork of determining the ethical investment priorities of the organisation, the process of writing and implementing an ethical investment policy can take place. An opening commentary or a brief mission statement detailing why, the chosen investment options, will provide an overview and background to the ethical investment policy.
The balance of the ethical investment policy needs to detail the guidelines for staff, including:
- whether negative or positive screening is to be used;
- The issues of utmost importance to the company when considering an investment in ethical funds; and
- Reviewing the performance of the assets and the corporate social responsibility behaviours of companies that the organisation has invested in.
If the organisation currently has other investments that are not ethical, it could include details of the termination dates in the policy.
Ethical investment policies assist organisations in participating in socially responsible investing. After determining the organisation’s moral beliefs, it can use the process of positive and negative screening to determine potential investment vehicles.