Ethical Mutual Funds, Screening the Screens

Moira Hutchinson

Ethical mutual funds are both responding to and stimulating the growing social investment movement. The emergence of these funds in the past four years in Canada is a positive development, but an investor must nonetheless approach any particular fund critically, to evaluate whether its investment decisions are likely to reflect the standards it proclaims.

Some funds have narrow screens, relating only to environmental impact. Other funds have intricate screens relating to a broad range of key social issues. While the broader screens may be more difficult to apply, they draw our attention to the interrelationship between peace, justice, and the integrity of creation. For example, would we consider a company to be socially responsible if it is environmentally “clean” at the expense of fair wages for employees?

How good are the screens applied by the funds? Applying a social screen is not a science, it is a series of judgement calls. It involves good research an area where some to the funds need to improve. It also involves carefully considered criteria, and the recognition that there is no pure corner in ethical investment.

For example, applying a criterion regarding a company's South African links is relatively easy it has generally been defined to mean investment in South Africa, and the necessary information is available. Applying environmental criteria is much more difficult. Should the company with the best environmental record in the mining industry be ruled out because all mining has some negative environmental impact, while the company, producing some environmentally benign but useless product passes through the screen? And is the integrity of the fund's investment decision hampered by a company's unwillingness to disclose needed information, or by the fund's own unwillingness to spend the money needed for research on a company?

What is the real impact of a fund not investing in a company? It is not unimportant that you may have found a mutual fund that reflects your values. But does investing in a screened, rather than an unscreened fund do anything except ease your conscience? What if company “X” doesn't know it was avoided by the fund, while company “Y” was invested in? When the Taskforce on the Churches and Corporate Responsibility (TCCR) recently checked with five Canadian funds, only one said it informs a company that has failed to satisfy its criteria, and only two said that they inform companies which they are planning to drop from their portfolios.

The small amounts of investment capital withheld by the social investing community are important, as they represent a change in the atmosphere of expectations of companies. But the funds will have greater impact as they communicate these expectations of companies.

Ethical mutual funds (EMFs) are the most important vehicle for social investment in Canada. EMFs are accessible, relatively unsophisticated and have had good financial success.

Despite their promise, EMFs are not without their faults. The SIO guide provides an in-depth review of both the problems and promise of the flagship for social investment in Canada.

To order the 20-25 page guide, write the SIO, #447-366 Adelaide St. E., Toronto, ON M5A 3X9 tel. (416) 360-6047

From The SIO Forum, A publication of the Social Investment Organization, Winter 1991, p. 2

(CX5091)

Subject Headings

Ethical Investment  Mutual Funds

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