Ethical Investing – Not all about Risk, Return

In our past posts we have been explaining the details of risk and return based portfolio optimization. But these 2 criteria are not alone in the list of parameters that can define the ‘goodness’ of a portfolio. Each user has his own choices on what constitutes a portfolio that will not only give him the economic return, but also the mental return that he wants. Is he investing in the right companies. The right company for an investor could be the company which would maximize his portfolio, stabilize his portfolio against market crashes or follow the best governance practices. An investor could also be inclined to invest in a company which has impressed him the most in terms of quality products.

India joined the bandwagon of ethical investing with its first socially responsible investing (SRI) fund, the Amro Sustainable Development Fund, which favors companies with high-disclosure policies on environmental, social and corporate governance yardsticks. SRI generally means putting money in companies with wholesome corporate values whose products and services do not ruin health or the Earth. Some such funds are also tied to specific religions, such as Christian- and Islamic-based funds, while others reject companies discriminating against homosexual employees. If you would like to see which companies constitute the portfolio of such funds, go to BNP Paribas SRI.

These funds are opposed to “vice funds” on the “Devil’s Index” where only profit counts, not the manner of profit and damage caused. Vice funds target “recession-free” companies such as those in gaming, tobacco, alcohol, aerospace and defense, and are gloomily based on the principle that as long as there are humans there will be a market for harming oneself and others.

Taking this idea further is the S&P environmental, social, and corporate governing (ESG) Index.  Sponsored by the International Finance Corporation and developed by a consortium of Standard & Poor’s, CRISIL, and KLD, the index represents the first of its kind to measure the ESG practices based on quantitative as opposed to subjective factors. Now Crisil’s ESG evaluation is an annual exercise. Using its own methodology, Crisil and its parent company Standard and Poor’s devised the S&P ESG India index of 50 companies. The components of this index change once a year when Crisil runs its ESG parameters. More data about the index, methodology and its constituents can be found at S&P ESG.

For further exploration into this topic, check out “Why do we Invest ethically?” In the paper, the authors try to explain the reasons for ethical investment and explain terms such as psychic returns and investor happiness.

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