Ethical Stock Investingby J Victor on January 2nd, 2011
Ethical investing or socially responsible investing is also known as sustainable, socially conscious investing – an investment strategy which seeks to maximize both financial return and social good.
Some investors feel that there are no standards which can be created for ethical investing since each individual has their own set of values and morals. If no standards are created, however, then even the most harmful investments can be called “ethical” by some. Anyone who tries to invest responsibly faces the ethical investment dilemma. This dilemma really revolves around two simple questions. They are: ‘What is or is not ethical?’ and’Who decides?’
Fortunately, there are several basic values that most people share:
- Avoid Causing Illness, Disease & Death
- Avoid Destroying or Damaging the Environment
- Avoid Treating Honest People with Disrespect etc..
So, arms makers, polluters, tobacco companies, pesticides manufacturers, companies with poor management record such as Enron and satyam, oil companies are some examples of businesses which are generally excluded.
In 2010, the OIC announced the initiation of a stock index that complies with Islamic law’s ban on alcohol, tobacco and gambling. The Dow Jones Islamic Market World Index is another example.
Another important trend is strict mechanical criteria for inclusion and exclusion to prevent market manipulation. Ethical indices have a particular interest in mechanical criteria, seeking to avoid accusations of ideological bias in selection, and have pioneered techniques for inclusion and exclusion of stocks based on complex criteria. Another means of mechanical selection is mark-to-future methods that exploit scenarios produced by multiple analysts weighted according to probability, to determine which stocks have become too risky to hold in the index of concern.
Critics of such initiatives argue that many firms satisfy mechanical “ethical criteria”, e.g. regarding board composition or hiring practices, but fail to perform ethically with respect to shareholders, e.g. Enron. Indeed, the seeming “seal of approval” of an ethical index may put investors more at ease, enabling scams. One response to these criticisms is that trust in the corporate management, index criteria, fund or index manager, and securities regulator, can never be replaced by mechanical means, so “market transparency” and “disclosure” are the only long-term-effective paths to fair markets.
ETHICAL INVESTING ENTERS INDIA
There is growing market demand for Socially Responsible Investment (SRI) and more investors are willing to invest over the longer term in the organisations that contribute positively to sustainable development, public benefit and environmental protection.ABN Amro launched India’s first SRI fund (called ABN Amro Sustainable Development Fund).
Global index provider Dow Jones indexes and Dharma Investments, a private investment company, in Jan, 2008 announced the launch of Dow Jones Dharma index for measuring the performance of companies selected according to the value systems and principles of Dharmic religions, especially Hinduism and Buddhism. This index has been put together by Wallstreet. Stocks will be screened on industry, environmental and corporate governance parameters before being included in the Dharma indexes. The index constituents would be reviewed on a quarterly basis.
Ethical investing depends on an investor’s views; some may choose to eliminate certain industries entirely or to over-allocate to industries that meet the individual’s ethical guidelines. A good way to start with an ethical investing policy is to write down the areas you want to avoid as well as where you want to see your money invested. From there you can come up with an asset allocation plan and begin researching individual securities.
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