FTSE4GOOD: HALF-BAKED SOCIAL RESPONSIBILITY?

Socially responsible investment (SRI) funds account for a fraction of the market but they are growing rapidly on both sides of the Atlantic. They do not invest in 'dirty industries' or 'baddies' like tobacco, nuclear weapons manufacturers or even Kyoto manipulators such as Exxon. However, from a Corporate Social Responsibility (CSR) perspective they are fundamentally flawed.

An important step toward SRI was recently taken in the launch of the FTS4good index by the London Stock Exchange and the FT. But, as I said in a correspondence with the FT1, the FTSE4good indicator is not an indicator of CSR, as some of its adherents had suggested, but a screening device. It is an indicator of what some people like and what they don't. Just like investing in all Asian companies or technology companies.

But, simply eliminating companies whose products you, or a committee, do not agree with is half-baked social responsibility. A better approach would be to grade the 'baddies' on a CSR scale, then reduce the portfolio investment in the 'baddies' but not eliminate it altogether. This is because what is bad today may be good tomorrow and vice versa - for instance, tomorrow airlines may be outed owing to the as yet unrevealed radiation risk of flying and Nestle once out may be in again.

Eliminating a company gives no space, nor incentive, for that company to improve its socially responsible rating over time. As SRI funds become ever more important, then investment for 'baddy' activity could dry up. Now most of us would not mind that for landmine or nuclear weapon manufacturers but some (including us) would be very upset if that meant the disappearance of Beaujolais!

This point was illustrated by Gareth Davis, Chief Executive, Imperial Tobacco2, when he noted that "as a big UK manufacturer of a legal but controversial product, Imperial Tobacco aspires to apply recognised criteria for good corporate governance, employee relations, health, safety and the environment and wider community relations". Cynics may smile at that point but given that people smoke (by the way no-one at MHCi smokes) is it not arguable that it is better to enter a dialogue with the 'baddies' to improve their CSR than to ignore them completely? Therefore, as Gareth Davies stated "We believe investors would be better served by a set of indices that represent a fair and objective assessment of identifiable business practices, rather than measures based on inclusion criteria that are completely inflexible and a subjective opinion of a company's products."

HOW COULD SUCH AN INDEX BE CREATED?

CRITICS, on MHCi's website , has attempted to produce such a rating. There an index is created that is based upon twenty questions about a company's CSR activities. The question on products is phrased as 'do you attempt to ensure that your product is used in a socially responsible manner'? This is then weighted as one of twenty items in the final index3. Now this is not, as Gareth Davies hoped for, a "fair and objective assessment', indeed, it is very unlikely that complete objectivity can be achieved in measuring CSR. But the CRITICS approach does allow a company to improve its CSR rating over time and, as such, if included as a criteria for portfolio investing would provide a more adequate indicator for CSR investing than FTSE4Good.

[Contributed By Michael Hopkins]
1. FT, Letters, July 11th, 2001
2. FT, Letters, July 14th, 2001
3. next month's Monthly Feature will cover the results of this exercise in detail

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