A study of ethical managed funds has found managers investing in companies that mine uranium and that have poor environmental or industrial relations records.
The Total Environment Centre, on behalf of an alliance of green and community groups, is undertaking what it calls the most comprehensive study yet of the $1.3 billion socially responsible investment (SRI) industry.
"SRI has the capacity to raise much-needed capital for vital new industries such as renewable energy, alternative waste technologies and bioremediation,'' says Dave West, the manager of the Total Environment Centre's Green Capital program. "Yet there is growing concern about whether SRI funds really deliver.''
The Total Environment Centre, a not-for-profit non-government organisation, has engaged a consultant to gather information from managers with retail SRI funds and ask why they invest in certain companies.
The centre says at least four companies that it says have controversial track records in managing their environmental and social responsibilities are commonly held in SRI portfolios.
Rio Tinto mines uranium. The centre says BHP Billiton has been "condemned'' for its role in OK Tedi and serious problems with its coal operations in the Sydney catchment area. It says that chemical company Orica has been the subject of intense protest over waste disposal techniques at its Botany plant in Sydney and transport company Patrick is best known for its role in disputes on Australia's wharves.
The table shows that BHP Billiton is held by eight of 14 SRI managers, Patrick by five managers and Rio Tinto and Orica each by four. "The question needs to be asked how does an SRI fund undertake an assessment that determines that these companies are deserving of ethical investments?'' says West.
He says some managers argue they have to invest in these companies because the Australian stockmarket is small and dominated by relatively few large companies. "There are still 60 blue chips out of the top 100 companies who, we say, are suitable for investment by SRI funds,'' says West. "So managers can find companies to invest in in most sectors of the Australian stockmarket.''
He suspects that the reason the funds are holding such companies is that they are using passive or index-like investment strategies and their portfolios are not that different from their mainstream funds.
Michael Walsh, president of the Ethical Investment Association and executive director of specialist ethical researcher Corporate Monitor, says the level of transparency with SRI funds is much better than with mainstream funds. Managers are disclosing their portfolios every month and the managers accept that investors who are not happy with their managers' portfolio will go elsewhere, he says.
He says what's "ethical'' is not always straightforward.
"On Patrick, there is a debate on the wharves dispute,'' he says. "Some say a more competitive waterfront is a desirable thing. And, with Patrick's deal with Toll Holdings, Patrick is going a long way to making railways a more efficient and sustainable means of delivering goods and of getting more freight off the roads and onto trains. This is an enormously positive thing for the environment.''
He says most managers assess companies by weighing up these pluses and minuses and coming up with a "balanced'' score. He thinks it is good that managers are being asked to explain how they arrive at a view on a company.
Walsh says investors who want to invest in managers that "raise the bar'' on ethical criteria must accept that returns are likely to be more volatile. This is because fewer companies are likely to be held in the fund. Also, its is likely that funds with stricter screening criteria will have a bias towards smaller capitalised companies, which also increases the volatility of their returns.
Harvey Kalman, the chief investment officer of one of the managers in the study, Equity Trustees, defends the inclusion of BHP Billiton and Patrick in its ethical portfolio.
"We have a simple negative screen where we avoid companies with interests in uranium, alcohol, tobacco or pornography,'' he says. "We avoided investing in BHP when it had uranium operations. When it sold those, we put it in the portfolio. And we do not have screening that would eliminate Patrick on industrial relations.''
West says his biggest concern is that the promises of socially responsible investing are not being delivered and it is his "constituents'' that tend to be in ethical investments.
"SRI has lost a lot of its way,'' says James Rose, author of Ethical and Active Shareholding. "It started off with so much promise but has lost a lot of its potential as it has become successful. If you look at the companies that are in [these funds], it is just ridiculous.''
The Total Environment Centre alliance includes the NSW Council for Social Services, Planet Ark, Amnesty International, WWF (World Wide Fund for Nature), Greenpeace, Minerals Policy Institute, Oxfam Community Aid Abroad and NSW's Nature Conservation Council.
The final report will be released in late November.
