ETHICAL INVESTORS - IS IT POSSIBLE FOR A CAPITALIST TO BE A PURIST?

By Ruma Dubey

Ethical investors? Somehow, when used in the context of stock market is seems more like a misnomer. And one cannot help but wonder how, where and in what does this clan, if they exist, invest in?

Ethics, in simple English means doing what is morally right and if we stretch it further to the corporate world, it means being socially responsible. Thus ethical investing means putting money in companies which are socially responsible, which could embrace anything from being transparent, being environmentally conscious, being labor friendly; basically has very high disclosure norms when it comes to social, environment and corporate governance. Well, if that is the criteria then that leaves us with very little companies to invest in; maybe even less than what can be counted on fingertips.

We have certain community of people who do not invest in liquor, tobacco, leather, poultry, meat stocks as these are all considered to be “sins” as per their religious beliefs. That to some extent is “ethical” as they are doing what they think is morally right. Maybe corporate governance and transparency do not figure out in the list of ideologies. Like they may buy into a fly-by-night company like Austral Coke but not buy Bata. So calling “religious” investors ethical would not be right. Many club it together with “Shariah” stocks but it is not essentially so. In fact Shariah stocks can be a sub set of ethical stocks.

Ethical investors are against all things “vice” which means they do not put money in companies which work only for profit, under any cost. In fact there are mutual funds which have ethical funds and they have something like a “Devils Index” which operates on the logic that anything which makes profits, is a good stock to buy.

International Finance Corporation and a consortium of S&P, Crisil and KLD have formed an index - S&P environmental, social, and corporate governing (ESG) Index, which measures ESG practices based on quantitative as opposed to subjective factors. It evaluates the transparency, disclosure and management systems of companies.

This is more like investing with a conscience. And if we were to list a few of these ethical stocks, what could those possibly be? First and foremost, one name pops into the mind – Infosys, for its transparency and ditto for TCS and Wipro. And if you look at most of the MNCs, they would fall into the criteria for good corporate governance, being socially and environmentally more conscious. Other names which could figure would include Tata Global, Dr.Reddy’s, ONGC, HUL, GlaxoSmithkline Consumer, Dabur, Marico, Titan, Cipla, HCL and more on these lines, mainly from the FMCG sector. Shree Cement also figured high amongst ethical stocks.

Tata Ethical Fund, which like Taurus Ethical Fund is designed on “Shariah” stocks, has a portfolio which includes stocks which are high on corporate governance like – Amara Raja, Lupin, Cipla, Maruti, Emami, NIIT, Cummins, Wabco, Kansai but it also includes mining stocks which are not necessarily environmentally friendly. It says that it avoids investments in companies involved in activities like alcoholic beverages, gaming/casinos, non halal food products and conventional financial institutional based on Riba (interest).

Yes, distinguishing ethical funds is indeed difficult as what could be high on corporate governance could be wrong on some other issue. Like RIL, it provides a more transparent set of numbers but its association with BP, which caused havoc in the Gulf Bay is not ethically right. Or for that matter Infosys, which is highest on all grounds but its past row over H1B visas casts an ethical shadow.

So being a purist ethical investor might restrict your choices and also your returns. More importantly, ethics is a very subjective matter and the lines are blurred when it comes to making a choice. It would instead be wiser to ethically evaluate stocks. Like this Norwegian fund… it held a large chunk of Wal Mart shares. It once came to light that Wal Mart locks up its employees in stores/warehouses to look after the goods and an employee once crushed his leg but could not get out as the employees were not given the keys. The state owned Norwegian fund sold its entire holding of Wal Mart. It was no ethical fund, it just was ethical when it came to judging companies it held in its portfolio, was more socially responsible.

Thus it is best to be ethical when choosing stocks and not choose ethical stocks.