Sunday, October 18, 2015

Ethical Investing - Part 1



Courtesy : Investopedia

What is ethical investing? The definition depends on your personal beliefs. Ethical investing is highly subjective because each individual investor has different ideas about what constitutes ethical behavior by a company, and different priorities that they want to support with their investment dollars.

Broadly speaking, however, ethical investing is a way of earning returns in the financial markets by supporting companies that are creating positive change in the world, or, in some cases, that aren't creating positive change; but aren't making the world worse, either. Ethical investors want to reach their financial goals in ways that coincide with their values. Their investing decisions are usually part of an overall strategy for ethical living that includes making values-based decisions about work, housing, transportation and shopping, among other concerns.

 
Ethical investing is still a niche investment style, but it has gained popularity.
According to the Forum for Sustainable and Responsible Investment (US SIF), "From 2007 to 2010, social investing enjoyed a growth rate of more than 13%, increasing from $2.71 trillion in 2007. Nearly one out of every eight dollars under professional management in the United States today, 12.2% of the $25.2 trillion in total assets under management tracked by Thomson Reuters Nelson, is involved in socially responsible investing." Furthermore, socially responsible investing "encompasses an estimated $3.07 trillion out of $25.2 trillion in the U.S. investment marketplace today." These figures were as of 2011.

Ethical investing isn't just for individual investors. Institutional invsetors also practice ethical investing. After all, many institutions, such as universities, are largely supported by individual donors, and the donors want their funds used in ways they approve of. Institutional investors are actually "the largest and fastest growing segment of the socially responsible investment (SRI) world," states US SIF.
Active Investing
Ethical investors are heavily involved in their investment decisions. They take their roles as part-owners of the companies they hold shares in seriously. They read annual reports and prospectuses, vote proxies and submit shareholder resolutions. They care who manages a company and who sits on its board. They are concerned about corporate transparency and accountability. They also want to know how companies are behaving with respect to the environment, social issues, human rights and workers' rights. Some ethical investors care about all of these issues; others choose to focus on just one or two. It's often difficult to find investments that meet 100% of an ethical investor's values and financial goals.

From a financial perspective, ethical investing has historically been considered a subpar investment style. However, it isn't true that socially responsible funds consistently underperform. Social investors don't have to sacrifice investment gains in the name of doing good. But, just like any type of investment, there are winners and losers in the ethical investing universe. It takes thorough research to find the investments that meet both ethics criteria and have the potential to meet desired performance goals.
Unethical Investors?
Of course, the idea that some investors are "ethical" doesn't mean that individuals and institutions that don't pursue ethical investing are unethical. Many people don't have the time, or the confidence, to make the active investment decisions required of ethical investors. Others simply don't like investing and want to put minimal effort into it. Chances are that these people are putting at least some of their money toward ethical causes whether they intend to or not. Investing for your family's future? That's ethical. And if you simply put your money in a Standard & Poor's 500 Index (S&P 500) fund, you can't help but have funds invested in a number of good companies.

What's more, people who consider themselves ethical investors often have to make compromises. A company that produces an ethical product might have some questionable business practices. A company that performs well on environmental issues might not perform well on social issues. A company that donates a percentage of its profits to the community might use sweatshop labor. Ethical investors are faced with the challenge of not only uncovering these complex issues, but deciding where to draw the line with their investments. Sometimes they will even invest in companies they are unhappy with and use shareholder activism to force the companies to change.

Even people who aren't particularly interested in the social, environmental, humanitarian or governance issues, that ethical investors support, can benefit from incorporating ethical investing principles into their investment strategies. Companies that treat people and the environment with respect are less likely to find themselves distracted by or burdened with lawsuits. Companies that have a positive image in the public eye are more likely to generate high sales levels. Ethical business practices can generate better profits and better returns for investors, especially in the long run. As Amy Domini, founder and CEO of ethical investment firm Domini Funds, puts it, "To pollute, to discriminate, to violate basic human rights, is just not good for business."

Ethical investing goes by a number of names, which will be used interchangeably throughout this tutorial. The most common is socially responsible investing; others include morally responsible investing, impact investing, mission investing, sustainable investing and triple bottom line investing (the triple bottom line being people, the planet and profits).



Ethical Investing: Environmentally-Conscious Investing

    



Ethical investors who care about environmental issues want companies to minimize their negative impact on the environment. When choosing which companies to invest in, they commonly focus on the following aspects of a company's operations: energy, waste and pollution; natural resource conservation and treatment of animals.
Energy, Waste and Pollution
All companies need to use energy, and all companies generate waste products. When we think of energy use and pollution, most of us probably think of manufacturers, but even the smallest operations need electricity to power their lighting and computer systems. Some ethical investors seek out companies that don't pollute much in the first place. Others seek out companies that have purposefully minimized their environmental impact, while still others seek out the worst offenders and plan to change their ways.

One way companies can reduce their energy use is to operate out of green buildings. Green building features, that reduce energy use, include windows that let in enough natural light to make overhead lighting unnecessary; window coverings that reduce heat penetration so air conditioning use can be minimized and solar panels. Companies that transport goods can reduce their use of gasoline by decreasing packaging - lighter loads require less energy to haul. They can also permit workers to telecommute or to commute at off-peak times; options that might not reduce a company's own costs, but might have a positive impact on the environment. What's more, workers who can avoid traffic jams or work from home are likely to be happier and more productive.

Companies can reduce waste through methods such as minimizing packaging materials, using recycled materials, implementing company-wide recycling programs and making products that are designed to last for years that have serviceable and replaceable components.

To avoid polluting, corporations can work with waste management companies to properly dispose of items they aren't sure what to do with, rather than practicing illegal dumping. Instead of discharging toxic wastewater, companies can invest in processes that clean the wastewater before it reenters the natural environment. They can also use nontoxic production processes to minimize the amount of toxic waste they have to process. 

Natural Resource Conservation

Ethical investors concerned with natural resource conservation are focused on preserving what we have by using resources more efficiently or switching from the use of scarce resources to the use of abundant resources.

Companies can conserve resources through everything from company recycling programs to their choice of faucets in the bathrooms (if the company owns the building). They can purchase products that are made from recycled materials and are able to be recycled after use. They can minimize their paper communications and maximize their electronic communications. Some credit card companies, for example, offer customers an incentive, in the form of bonus reward points, for choosing electronic statements over paper. Companies that provide bottled water for employees can, instead, offer reusable water bottles and install water filters to encourage employees to use tap water.
Companies that extract natural resources, including oil and natural gas companies, seafood purveyors, mining companies and forest products companies can choose to extract resources in a responsible manner.

Treatment of Animals 

Some investors (vegans) don't think it's ethical to use any animal products whatsoever, and some vegetarians might find companies that are involved in meat production to be unethical. Other investors do consume animal products, but believe they should be produced in a humane and sustainable way.

Any company that is involved with animal testing or expressly prohibits it might attract attention from ethical investors. Some cosmetics companies and household products companies test their products on animals for "skin or eye irritation, skin sensitization (allergy), toxicity (poisoning), mutagenicity (genetic damage), teratogenicity (birth defects), carcinogenicity (causing cancer), embryonic or fetal genetic damage and toxicokinetics (to study the absorption, metabolism, distribution and excretion of the substance)," according to the animal rights advocacy group Go Cruelty Free.

Ethical investors are also interested in food companies that bring nutritious and safe products to the market. These include companies that use organic and natural ingredients, that don't use pesticides, minimize processing, use little to no artificial additives, use seasonal and locally grown ingredients and produce healthy and nutritious foods. Ethical investors may want to avoid companies that practice factory farming and heavily use pesticides, fertilizers, hormones and antibiotics. Instead, they may want to invest in companies that grow organic, produce grass-fed beef and dairy products and raise free-range chickens. Ethical investors may also seek out companies that engage in fair trade practices with international suppliers

Why Environmental Policies and Practices Matter

Whether you consider yourself an environmentalist or not, there are good reasons to care about the environmental policies of any company you invest in. Companies that pollute may face regulatory fines which will reduce shareholder profits. Many environmentally friendly changes save companies money and increase their bottom lines. And companies that employ environmentally responsible policies may be more likely to have a positive public image and generate consumer loyalty.

Ethical Investing: Socially Responsible Investing  
         
Numerous issues make up the social constellation of the ethical investing universe. Many of these issues have to do with a company's relationships with outsiders (we'll cover relationships with workers and with shareholders in later sections). Let's begin by examining the kinds of relationships companies can choose to have with their suppliers.
Supplier Relations
Socially responsible investors want to know that the companies they invest in have mutually beneficial and respectful relationships with their suppliers. They want to see that companies are working with high-quality suppliers that don't cut corners and those suppliers are held to the same ethics standards the company holds itself to. It doesn't do much good for a company to claim that it doesn't use sweatshop labor if it buys merchandise from a supplier who does.

Some investors worry that powerful companies force suppliers' prices down and don't pay them fairly; other investors might argue that if a supplier agrees to do business, the relationship must benefit them, and that if it doesn't, the supplier is free to exit the relationship as soon as any existing contracts expire.

According to the Domini Funds website, "Information on supplier contracts tends to be anecdotal and usually surfaces for a relatively limited number of corporations that are exceptional on either the upside or the downside." Thus, investors may find themselves in the dark when it comes to a company's relationships with the members of its supply chain. If this information is especially important to them, they can take an activist position and try to get companies to disclose this information.

Community Relations

Every company impacts the communities where it operates. The question is whether that impact is negative or positive. Often, it's a combination of both. A new store might increase competition and give consumers lower-priced options, but it might take market shares away from existing businesses in the community. A new distribution center might create hundreds of jobs, but increase 18-wheeler traffic on local highways and roads.

Companies can make ethical decisions about the way they operate to maximize positive effects, and minimize negative effects on the community. They can also make charitable contributions to the community by donating a portion of profits, doing volunteer work, sponsoring the local little league team or helping out with community fundraisers. For example, Johnson and Johnson, in its 2010 Contributions Report, states that the company works with hundreds of community-based programs on initiatives such as disaster relief and maternal and children's health. The company also double-matched its employees' charitable donations, and gave a total of $603.3 million in cash and products. Newsweek ranked the company near the top at No. 4 in its 2010 environmental rankings of America's largest 500 publicly traded companies. 


Screening out Sin

One of an ethical investor's foremost concerns will be the nature of the product, or service, a company sells. Some investors want nothing to do with a company that sells a product or service that's harmful or addictive. The stocks of these companies are called "sin stocks," and the companies that most commonly fall into this category are those that sell products or services related to pornography, tobacco, alcohol, weapons or gambling. Such investors would avoid companies like Phillip Morris (the U.S.'s largest cigarette manufacturer), Anheuser-Busch InBev (owner of numerous beer brands) or MGM Resorts International (which owns several casinos).

Other investors don't see these companies as sinful. They think it's up to the individual to make responsible choices regarding products and services that have the potential for abuse. 

Government Interactions

Any company that is large enough to be publicly traded must interact with the government on a number of levels, from Securities and Exchange regulations to consumer safety regulations to environmental regulations and more. How the company chooses to behave in those interactions says a lot about the integrity of its managers and executives.

Some businesses lobby the government to win special treatment via subsidies, tax loopholes, regulatory loopholes and even regulations that punish competitors.

Financial journalist Charles Gasparino writes about a major instance of this problem in his book, "Bought and Paid For: The Unholy Alliance Between Barack Obama and Wall Street." Not only did the government bailout a number of Wall Street firms during the financial crisis, but when federal, state and local governments borrow money, they turn to Wall Street firms, so it's in Wall Street's best interest for government debt levels to remain high. All Americans, then, pay the price in the form of higher taxes. A socially responsible investor might want to avoid these firms.

Economist Bruce Yandle is well known for his bootleggers and Baptists theory, which explains how groups whose interests would seem to be in opposition often work together to achieve a mutually beneficial, but unsavory, goal. In his 2010 article, "We Want to Be Regulated," Yandle points out that while most people think big corporations want minimal government regulation, the opposite is often true. For example, a company that produces clean technology might lobby the government for tighter restrictions on a more polluting version of a similar technology. Why? Because regulations that not only favor one company but also make life harder for its competitors are likely to increase the favored company's revenues. Ethical investors must ask themselves if they want to profit from companies that lobby the government to help them earn their profits.

The number of social issues a company must contend with is too large to cover here, but supplier relations, community relations, customer satisfaction and government interactions are some of the key issues. In the next section, we'll examine how companies choose to interact with their workers.

61 comments :

  1. a super article....sir thats the reason din participate in skm...n other pesticide stocks..

    ReplyDelete
    Replies
    1. What are your views on SKM Eggs now? I had earlier bought at 177 and sold at 205, then added back at 210. now should I add more?

      Delete
    2. This blog is intended only for long term investors , not for positional traders

      Delete
  2. Dear Sir.. Your valuable views on GAEL would be highly appreciated. I did quite a bit of research on GAEL and found that they are moving big time into Corn and maize derivatives. Only concern is that I am not able to find enough data about corn demand/Supply in India and Abroad if GAEL is going to export. Just wondering if this can be a future multibagger?

    ReplyDelete
    Replies
    1. Business highly dependent on weather conditions( On raw material side)

      Delete
  3. Dear sir, Agreed it is subjective! Buying shares of tobacco companies to me not preferred if have alternative choice though the raw material supplies comes from poor farmers.

    ReplyDelete
  4. Hi Sir,
    Last year you have given the below comment on RS Software, now when the share is hitting a 12 months low do you think it is a buy and did you get any clarification on the below.

    VP Comments :
    I agree with you that the space in which RS Software operating have good potential .But the major issue with the company is the promoters itself frequently buying and selling their shares,means they are trading in the shares of their own company. So I take their published numbers with a pinch of salt .I am not saying they are manipulating their numbers , they are frauds,or the share price will not move up or so , but I have no confidence to recommend this stock to my readers till the management give a convincing explanation for their action.

    ReplyDelete
    Replies
    1. Did you find any explanation from management side on the mentioned subject ?

      Delete
    2. I could not find any thing the RS management has said on the subject.. however there is difference in my looking and yours :)

      Delete
  5. Dear VP sir,

    Your view on Shriram EPC after the recent pref allotment to promoters and CDR which would reduce the debt by more than half?

    Thanks sir.

    ReplyDelete
    Replies
    1. Fund infusion is positive , but sector revival should happen.

      Delete
  6. Kindly your opinion regarding time technoplast at CMP?

    ReplyDelete
  7. Sir,
    I asked about Rossell because it was tracked by you. Kindly inform me if you are not tracking it now. Expecting your valuable reply
    Thanking you

    ReplyDelete
    Replies
    1. Stock already suggested @ Rs.38, neutral at CMP Rs.115

      Delete
  8. HI please share your view on NEOCORP

    ReplyDelete
  9. Sir,

    Please share your view on Force Motors.

    Thanks,
    Deepak

    ReplyDelete
  10. sir, kindly share your views on ashok leyland

    ReplyDelete
  11. Dear Sir,

    Your view on AVT Natural Products

    As Q2 results is seems to be better

    Thanks,
    Anand

    ReplyDelete
    Replies
    1. Stock suggested at much lower level ( adjusted to stock split and bonus) , neutral at CMP

      Delete
  12. iam holding following compaies arihant foundation, aban offshore, jindalsteel, dhanalaxsmi bank. please give your opinion

    ReplyDelete
    Replies
    1. Only one tracking from this list is Aban , which is a contra bet for investors with enough patience.

      Delete
  13. Please suggest some companies in India for ethical investing...

    ReplyDelete
  14. Vp sir can v buy salzar electronics at cmp 232

    ReplyDelete
  15. Your views on Samtex Fashions, Amarjothi Spinning Mills, Sterling tools, Sambandam Spinning Mills and Sarla Performance Fibers and Sri Lakshmi Saraswathi Textiles (Arni) and Shiva Texyarn?

    ReplyDelete
    Replies
    1. Sterling Tools already suggested @ Rs.97 ,( http://value-picks.blogspot.in/2010/04/sterling-tool-improving-business.html) , neutral at CMP Rs.341

      Delete
  16. Sir, shall there be any impact of news of winding up petition being admitted against aksh opti fibre ltd in rajasthan high court in connection with one of its subsidiaries?

    ReplyDelete
    Replies
    1. Company already given explanation for this and the same filed in BSE website.

      Delete
  17. Sir, my querry regarding kwality ltd not posted by you. Please guide on the stock if you are tracking it. I am interested and positive on the stock. But your experience can save me if i am wrong in assesing the stock.

    ReplyDelete
    Replies
    1. Not tracking Kwality which I mentioned many times in the past too.:)

      Delete
  18. Happy Dussehra sir to you , your family and all . God bless all and wishing all of you Happy Vijayadashmi. Enjoy the winning of Dharma over Adharma.

    ReplyDelete
    Replies
    1. Thanks and same to all of my readers

      Delete
  19. Dear VP,
    Could you please comment whether the delisting plan of the DIC India is shunned or still it is on?
    I asked similar question earlier and it went unanswered. Trying my luck again
    Thanks,
    R

    ReplyDelete
    Replies
    1. Who can answer for this ? , Only company management .

      I am not an insider :)

      Delete
  20. hai sir,

    ur view on vadilal for longterm?

    ReplyDelete
    Replies
    1. Vadilal is an already suggested stock to buy @ Rs.105 ( http://value-picks.blogspot.in/2012/06/vadilal-industries-ltd-buy.html)

      Neutral at current price Rs.637

      Delete
  21. Sir

    Skm egg is going down day by day....any idea why

    ReplyDelete
    Replies
    1. Don't think stock price is like a rocket to move only in one direction. Movement on either side , consolidation,correction..etc are part of market.

      Delete
  22. Hi VP,

    Indiabulls housing finance has been giving good numbers for many quarters with high ROE, ROCE,etc. And they have been paying 50%profits as dividends with a growth rate of 25-30% Per annum for last 3 yrs.
    1) Is it really sustainable with such high dividend payouts.
    2) In this Qtr their no. of shares increased from 25cr to 32cr (I guess which means equity dilution). They have been doing this based on needs.
    Is this process of paying out high dividends and diluting equity for higher growth good for investors ?

    Regards,
    Vinay

    ReplyDelete
    Replies
    1. Not tracking any cos from Indiabulls group

      Delete
  23. Sir why Skm is correcting, is there any negative news or whether weaker hands exiting the stock just before the major event i.e results ?

    ReplyDelete
    Replies
    1. Dear

      We can't insist each and every investor should behave in the same manner . There may be a section of investors who are not interested to take the risk of result and having a short term view . Since their strategy is different than long term investment ,we can't blame such investors for exiting before result . Keeping realistic expectation is the best way to take unbiased decisions. In case of SKM , I am expecting a better result in this September quarter compared with the the same period of last year and even better result in next quarter ( provided there is no sharp spike in raw material cost ) which is traditionally good compared with all other quarters

      Delete
  24. Sir,

    Looks like the frequent dilution of equity due to fccbs is the prob in subex. Right now equity has incrreased to rs 260 cr with $ 60 mn of fccbs still remaining. No doubt, the persons who are in control of subex are excellent but can they really make so much profits to service the huge equity ? Your comments pls. Pls answer sir

    HK

    ReplyDelete
    Replies
    1. Debt is reducing from the other side.

      Delete
  25. This comment has been removed by the author.

    ReplyDelete
  26. Hi ValuePick,

    Was reading your note on Lactose India from 2012. Is there any update on the situation ?
    Kerry after mentioning about the Lactose India acquistion in their 2011 AR, almost did no follow up to it in last 4 years :)
    In the meantime Lactose India has gone on performing ok ok until recently when the probably the completion of lactulose (a higher value product) facility have given a bump to the margins.
    Given that Lactulose is an ingredient in pharma and food products, i am guessing it's Kerry again, which is backing Lactose to pick up the output from production.
    Also, given that milk is an input to Lactose and Lactulose production, company being based in India has some advantages in terms of raw material prices being low in India compared to world price. Also, probably promoters old and long association with Amul is helping them to source the raw material more smoothly ?

    Would be great to get your views
    rajpanda@gmail.com

    Regards

    ReplyDelete
    Replies
    1. If management is not transparent and ethical , how we can believe them.?

      Delete
    2. True. There is no denying that if promoters are not trust worthy no point in investing.
      By the way, did you get a chance to attend the AGM and pose the question directly to promoters ?

      Regards
      Raja

      Delete
  27. Dear VP Sir,

    Request you to provide ur view on Subex as i had invested @15 Rs. Should i exit from ?... Plz advice...

    ReplyDelete
    Replies
    1. I think , you have studied the company very well before investing and find a reason to invest in it . Take a decision based on whether that reason still existing or not.

      Delete
    2. Will u have any write up or blog on subex as i want to understand the business n potential for future

      Delete
  28. Dear Vp sir,

    Happy Dushera.Please provide your view on Zen Technologies.

    Thanks

    ReplyDelete
  29. This comment has been removed by the author.

    ReplyDelete

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