VSB – TECHNICAL UNIVERSITY OF OSTRAVA FACULTY OF ECONOMICS
DEPARTMENT OF FINANCE
Posouzení možnosti etického investování na finančním trhu Assessment of the possibility of Ethical Investing in Financial Market
Student: Xiaoxue Peng
Supervisor of the bachelor thesis: Ing. Kateřina Kořená, Ph.D.
Ostrava 2019
3
Content
1 Introduction ... 5
2 Characteristic of Ethical Investing ... 6
2.1 The Overview of Ethical Investing ... 6
2.1.1 Definitions ... 6
2.1.2 Origin and History of Ethical Investing ... 8
2.1.3 Development Timeline of Ethical Investing ... 9
2.1.4 Goals and Significance of Ethical Investing ... 10
2.2 The Main Strategies of Ethical Investing ... 11
2.2.1 Screening ... 12
2.2.2 Stakeholder Engagement ... 14
2.2.3 Communitity Investment ... 14
2.3 Forms of Ethical Investing ... 17
2.3.1 Mutual Funds and ETFs. ... 17
2.3.2 Alternative Investments ... 20
2.3.3 Community Investments ... 21
2.3.4 Microfinance ... 22
3 Development of Ethical Investing in Financial Markets ... 24
3.1 Overview of the Ethical Investing Development Nowadays ... 24
3.1.1 Current Situation ... 24
3.1.2 Third Party and Voluntary Organization ... 25
3.2 Development of Ethical Investing in Financial Market in the United States ... 26
3.2.1 Origin and History of Ethical Investing in the Unitied States ... 27
3.2.2 Development of Ethical Investing in the United States ... 28
3.3 Development of Ethical Investing in Financial Market in China ... 32
3.3.1 Origin and History of Ethical Investing in China ... 32
3.3.2 Development of Ethical Investing in Financial Market in China ... 33
4 Possibilities of Ethical Investing in Contemporary Financial Markets ... 37
4.1 The Frame Status of Ethical Investing ... 37
4
4.2 Ethical Funds Selection... 37
4.2.1 Description and Comparison of Selected ETFs... 38
4.2.2 Description and Comparison of Selected Mutual Funds ... 44
4.3 Comparison of ETFs and Mutual Funds ... 49
4.4 Trends of Ethical Investing in Contemporary Financial Markets ... 52
4.4.1 Addressing Homelessness with Social Impact Investing ... 53
4.4.2 A New Focus on Renewable Infrastructure over Research ... 53
4.4.3 Greater Accountability through Data ... 53
4.4.4 Ethical Practices that Outpace Regulation ... 54
4.4.5 More Profitable Ethical Investment ... 54
4.5 Recommended Steps for Ethical Investors ... 54
4.6 Space for the Development of Ethical Investing ... 56
4.6.1 Enlightenment to China's Ethical Investing ... 57
4.6.2 Brief Summarization ... 58
5 Conclusion ... 60
Bibliography ... 62
List of Abbreviation ... 65 Declaration of Utilization of Results from the Bachelor Thesis
List of Annexes Annexes
1 Introduction
During the last years, the Ethical Investing, also known as Socially Responsible Investment (SRI), has been in the public eye among investors and financial intermediaries as well as governments around the world. Not only developed countries such as the United States and the Europeans countries paid heavy attention to it, but the developing countries, China, for example, also tried to catch up this 'good-for-develop' express, which is a new type of model that aligns investment decisions with the economy, society and environment with Rapidly growing in the world in recent years. The differences between this emerging investment model and the traditional investment, especially the feasibility of investing, is a matter of concern. Regarding the value of solving the real problem, this thesis primarily aims at assessment the possibility of ethical investing in financial market. Through assessment of the development of ethical investment in China versus the United States, specific proposals for developing countries will be listed. Drawing the conclusion on the feasibility of ethical investment by collecting, estimating and comparing fund data.
The thesis is divided into five chapters. The first chapter is the introduction that mainly introduces the background of this topic and offers the aim of this thesis, which try to show investors the advisability of ethical investing by assess the ETF and mutual funds.
The second chapter focus on the characteristics of ethical investing, which includes the background of the ethical investing, the definition s that represent the same meaning of ethical investing, and the forms of ethical investing, and the four main strategies of ethical investing that are mostly commonly used in today‘s financial market.
The third chapter focus on' the further comparison and conclusion of the development of ethical investing in financial markets, which mainly focus on two countries — the United States and China. The history and origin of the two countries’ ethical investing.
The fourth chapter focus on the most important part which assess the advisability of ethical investing in contemporary financial markets. Some basic data such as total fees and the risk standard deviation will be collect together and compared. Besides, the advisability of ethical ETF and mutual funds will mainly be assessed by HPR.
The final chapter is the conclusion of this thesis, summarizing the basic ideas of ethical investment embodied in this thesis and the possibility and vision of ethical investing.
2 Characteristic of Ethical Investing
In this part the characteristics of ethical investing will be discussed, including the origin and background of this emerging investing. In addition, this chapter will mainly focus on the basic definitions of ethical investing, and the significance of ethical investing in order to provide a blue map so that a basic and necessary ideal will be explained.
2.1 The Overview of Ethical Investing
This part introduce the basic information which covers the different kind of definitions of ethical investing and simply introduce the difference between them, and the origin and history of ethical investing, also the meaning and goals of ethical investing will be discussed.
2.1.1 Definitions
Ethical investing is an investment approach that takes into account both ethical and investment factors when making an investment decision, in simple terms, it means you can avoid putting your money in companies that behave badly and invest in line with your own values instead of by some screening mechanisms[1]. With the development of social economy, the definition of ethical investment has been diversified and the name has been continuously updated and differentiated different focus (See Table 2.1), Therefore, it is necessary to learn the terms which are similar to the definition of ethical investing as following.
Table 2.1 Definitions of SRI, Impact Investing and Sustainable Investing
SRI Sustainable investing Impact Investing
Definitions
Excluding companies or sectors that aren’t
compatible with investors’ missions or
values.
Identifying data on companies’ ESG policies
and practices and systematically incorporating these considerations into the
investment process.
Investing with the intention of generating a measurable, beneficial, social or environmental impact along with a
financial return.
Source: https://www.oppenheimerfunds.com/advisors/article/esg, author
1 Available on:https://www.ezonomics.com/whatis/ethical-investing
Socially responsible investing(SRI), the acting of choosing your investments on the basis of social good as well as financial gain. The investors of socially responsible aim to invest in companies that do business in positive and responsible ways. It enables you to grow your money while doing good and allows you to invest in social causes you care about (Levitt, 2017).
Today, socially responsible investing is a bit more complicated, but the underlying principles remain the same. And that’s to balance the traditional four levels of corporate responsibility while seeking those firms with superior business models and forward-thinking attributes that are focused on the long term (Levitt, 2017). This means making a profit, but doing so without violating any laws, ethics or ideals as well as making an effort to benefit society.
Impact investing, are investments made into companies, organizations, and funds with the intention to generate social and environmental impact alongside a financial return (French, 2017). They can be made in both emerging and develop markets, and target a range of returns from below market to market rate, depending on investors’ specific objectives.
Sustainable investing, is also a broad term for investment approaches that consider environmental, social and governance (ESG) factors and their impact. The category includes strategies that fall along a spectrum, with ESG Investing the most commonly used term (French, 2017).
Green investing, refers to the investing of allocating capital towards projects whose aim is to benefit the environment. And this financial operation can be carried out by individuals, equity firms, hedge funds or corporations as well. The projects include more than pollution reduction, protection of the ocean, waste management and water resource management and so on (See Table 2.2).
Table 2.2 Mainly Investments Green Investing Focus On
Source: https://www.cbd.int/financial/gcf/definition-greenfinance.pdf, author
Although the names above are different, and their focus are different from one another, we may safely draw the conclusion that the ethical investing can summarize the above four concepts and at the same time pay more attention to investors’ investing behavior, which is the reason why this thesis has chosen the ethical investing as the research object. In conclusion, Ethical investing refers to the social ethical standards in addition to traditional financial indicators, such as the sustainability of expected stable profit distribution, compliance with laws, employment habits, respecting for human rights, consumer issues, social contributions, and concerns about environmental issues. Foundation, evaluate and select the investment made by the company.
2.1.2 Origin and History of Ethical Investing
Ethical investing is a relatively new type of investment model that has developed rapidly in the world in recent years. As defined above, it is an investment model that integrates investment decisions with economic, social, environmental and other ethical factors.
Ethical investing actually originated very early. In the Bible era, Jews had investment standards that set their moral value to invest. In the 16th century, George Fox created the Quakers sect in the United States, which believes in human rights equality and war against violence, and also uses these social standards to regulate investment behavior. These are
Green Investing
Renewable energies
Energy efficiency
Industrial Pollution control Water sanitation
Waste processing cycling Climate change adaption
considered to be The first batch of ethical investors.[2 ] Since then, they have had a preliminary awareness of socially responsible investing ( Donovan , 2019).
Modern ethical investing originated in the 1960s, when environmental protection, anti-war and pursuit and equality issues were flooded with Europe and the United States. In the United States, some people tried to oppose the Vietnam War by means of investment. The earliest ethical fund was issued by Sweden in 1965. In 1971, the first local Ethical Fund appeared in the United States, and the first British ethics fund was issued in 1984 by Friends Provident's Stewardship Trust. Currently, the largest socially responsible investment market is in the United States, followed by the United Kingdom, the Netherlands and Sweden.
Among them, the total assets of socially responsible investment in the United States and the United Kingdom have exceeded 3 trillion US dollars, growing at a rate of more than 30% per year, becoming an investment force that cannot be ignored by the fund management community in the world. Today, 21 countries around the world have financial products related to socially responsible investment (Donovan, 2019).
2.1.3 Development Timeline of Ethical Investing
Practitioners of ethical investing or sustainable or socially responsible investing (SRI) take note of its roots dating back more than 200 years ago to money management practices of the Methodists. Others suggest this goes back to the ideas long championed in Sharia investing if not beyond. John Wesley, the founder of the Methodist movement, urged his followers to shun profiting at the expense of their neighbors. Consequently, they avoided partnering or investing with those who earned their money through alcohol, tobacco, weapons, or gambling-essentially establishing social investment screens. John Wesley, the founder of the Methodist movement, urged his followers to shun profiting at the expense of their neighbors. Consequently, they avoided partnering or investing with those who earned their money through alcohol, tobacco, weapons, or gambling-essentially establishing social investment screens. While the Methodists and members of other faiths applied particular principles to their investments through the years (Muslims did not invest in banks, for example), it was not until the sixties (See Table 2.3) that socially responsible investing
2 The Origins of Socially Responsible Investing https://www.thebalance.com/a-short-history-of-socially-res ponsible-investing-3025578 WILLIAM DONOVAN Updated March 26, 2019
vaulted forward as an investing discipline (Donovan , 2019).
Table 2.3 Development Timeline of Ethical Investing
The '60s ·The first Earth Day was celebrated in 1970.
·Social activism spread to labor-management issues at corporations, while protection of the environment also became a
consideration for more investors.
The '70s ·Civil rights and racial equality rose in prominence.
·Protests against the Vietnam War and the boycott of companies that provide weapons used in the war.
·Progress continued for SRI, most notably the effort to end the racist system of apartheid in South Africa.
The '80s ·Calvert Social Investment Fund Balanced Portfolio and the Parnassus Fund applied positive and negative screens to their
stock selections.
The '90s ·The Domini Social Index, made up of 400 primarily large-capitalization U.S. corporations, comparable to the S&P
500, was launched in 1990.
·Support for community development financial institutions grew during the 1960s as a way to address racial
inequality
Present Day ·An acceleration of positive approaches of ethical investing , as sustainability strategies continue to add financial
value to companies and their shareholders.
Source:https://www.thebalance.com/a-short-history-of-socially-responsible-investing-302557 8, author
2.1.4 Goals and Significance of Ethical Investing
“If we find and improve the moral and cultural deficit today, we will reduce the reputation crisis that may occur tomorrow.” (Anthony Hilton, Investment Ethics Report, evening standard, 2015)
The goal of ethical investing can be macroscopically and microscopically. At the macro level, this kind of investing behavior creates long-term value, based on the perspective of sustainability. And it is precisely because the term “sustainability” includes the economic bottom line, the ethical bottom line and the environmental bottom line that it is widely used nowadays. At the micro level, socially responsible investment is a strong reflection of the values of investment entities. The essence of ethical investing is choosing investments that are in line with your values. However, those values aren’t the same for all investors. Ethical investing investors choose their investments to promote a variety of different goals.
The spirit of ethical investing is to actively use innovation and important resources to work hard to solve social problems and change the world in an optimistic way, so that the whole world can benefit. Even if investor’s personal value is different from each other. For instance, “Green” investors prefer companies that don’t pollute the environment. Some refuse to invest in fossil fuels, while others look for companies that minimize the carbon footprint of their products and services. Some “Social” investors refuse to do business in countries with a record of human rights violations. Others look for companies that provide their workers with fair wages and decent working conditions. “Peace-Promoter” like the early Quakers, peace investors won’t invest in war in any way. They avoid all companies that make weapons or profit from conflict in foreign countries. And as for the “Health-Promoter”.
Many socially basic accommodating to invest in companies that sell tobacco or alcohol.
Others refuse to invest in products that they think pose a threat to human health, such as genetically modified organisms. Since some of these products can also be seen as Threats to the environment, this category overlaps with green investing. And for those who concerns about morality. Many investors today continue the time-honored practice of avoiding “sin industries.” Different investors see this category as including different types of enterprises, such as liquor, gambling, pornography, and contraception. There is no rank for the ethical value, and all the acts are contributed in their way to different aspects of our planet, they just choose their investments based on different standards.
2.2 The Main Strategies of Ethical Investing
As a new product, ethical investing requires a scientific and feasible strategy system to assist in the implementation. So far, an effective strategy mechanism has been formed,
which includes individuals, businesses, schools, hospitals, foundations, pension funds, religious groups and non-profit organizations, that hoping to achieve a better, fairer and more sustainable economic society while achieving financial goals. Under the guidance of these goals, socially responsible investments can be divided into three types of investment strategies: Screening, Shareholder Advocacy and Community Investing.
Table 2.1 Main Types of Strategies in Ethical Investing Strategies Screening
(Positive/Negative)
Stakeholder Engagement
Community Investment Main Feature According to investor
personal preference
Use shareholder rights to influence company
Help areas not covered by traditional finance Source: https://www.moneycrashers.com/socially-responsible-investing/, author
2.2.1 Screening
Screening is a process for vetting companies which excludes from investment those whose activities conflict with your ethical views and approves for investment companies whose activities either don't raise concerns, or have positive social or environmental benefits.
The screening strategy can be divided into positive screening and negative screening. The following is explained separately.
Positive screening means that when socially responsible investors choose fund products, they hope that the fund will only invest in companies that have made positive contributions to society (Anders, 2016). For example, the fund only buys companies that attach importance to labor relations, environmental protection, product safety quality and human rights’ stocks.
The negative screening is more complicated than the positive screening that the fund avoids investing in companies that cause harm to society, such as tobacco companies, companies engaged in gambling, and companies that produce weapons of mass destruction (Anders, 2016). In the United States, for example, the top five companies most frequently screened by the fund include tobacco companies, companies that produce alcohol, companies that do not value labor relations, companies that do not value environmental protection, and companies that engage in the gambling industry. Companies that value human rights, equal
employment opportunities, and environmental protection are often favored. In recent years, as corporate scandals have emerged, corporate governance, board composition, and disclosure of information have gradually become new screening criteria.
To exemplify this strategy in detail here take Standard Life Investments UK Ethical Retail Fund for instance. The actively managed Standard Life Investments UK Ethical Retail Fund aims to provide long-term growth by investing in a diversified portfolio of UK equity assets that meet their strict ethical criteria as set by their Ethical fund's advisory group. (See Table2.2)
Table2.2 Standard Life UK Ethical Fund Criteria
Standard Life UK Ethical Fund Criteria
Positive Criteria Negative Criteria
Enviroment: Companies that have a positive impact on the enviroment
Alcohol: Manufacture of alcoholic beverages
Human Rights: Companies that respect and support the human rights of those affected by its business
Nuclear: exclude miners of uranium, and operators and owners of nuclear power stations, deriving more than 5% revenue from nuclear power.
Employment: Companies that respect diversity and support strong labour practices
Alcohol Production: The funds will not invest in companies that derive 10% or more of revenue from alcohol production
Source: https://www.yodelar.com/insights/the-5-best-ethical-funds, author
These socially responsible funds, also known as Ethical Funds, can be divided into two types, one is privately funded, and is set up by private or investment institutions in accordance with their own social environment screening criteria. Funds, whose investors include religious groups, government agencies, trade unions, foundations, etc. The other is a public fund that is invested by the general public and institutional investors. In the United States, more than 90% of ethical funds are privately funded. At present, the total assets of their ethical funds exceed 2.14 trillion US dollars, and the number of public ethics funds has exceeded 200.
2.2.2 Stakeholder Engagement
Shareholders' claims mean that investors participating in socially responsible investment give full play to the rights of their shareholders, negotiate with the company, take action when necessary, influence and correct the company's behavior, and achieve better corporate governance and social responsibility. Corporate governance focuses on the company's trust voting, board composition, directors' compensation, severance fees, stock option incentives, and corporate restructuring. Corporate social responsibility includes the company's important information disclosure, the company's social responsibility for environmental, labor, ethnic, health and safety policies. Investors can change the company's decision-making by making dialogues with the management of the company they invest in, communicating with letters, filing shareholder resolutions, and even voting with a power of attorney.
In recent several years, although unlike other strategies, it still develop well among all.
Shareholders have advocated a dual-purpose trend that emphasizes both corporate governance and corporate social responsibility (See Table2.3 as the Active ownership).
“Sustainable corporate governance” has increasingly become the focus of new shareholder claims. In addition, investors in social investment institutions such as funds, foundations and banks play an increasingly active role in shareholder claims.
Table 2.3 The Development of Different Strategies of Ethical Investing
Strategy($billions) 2012 2014 2016
Portfolio screening $12,317 $17.322 $22,264
ESG integration $5,939 $7527 $10369
Active ownership $4,589 $5,919 $8,365
Source: ESG,SRI,and impact investing:A primer for decision-making. Vanguard Research, author
2.2.3 Communitity Investment
Community investment means that funds from socially responsible investment are mainly invested in communities that are difficult to cover by traditional financial services.
For example, providing financial services to low-income households, providing funds to
small and medium-sized enterprises, and providing important community services such as child care, affordable housing, and medical care. Funds are basically invested in the following four community development agencies: Community Development Bank, Community Development Loan Fund, Community Development Credit Cooperative, and Community Development Venture Capital Fund. Investors can purchase social investment funds that focus on investing in these four types of community development agencies to achieve their social responsibility goals.
Take the United States for example, the community investing sector has experienced rapid growth over the last decade, nearly doubling in assets between 2014 and 2016, and growing just over 50 percent from 2016 to 2018. The largest growth in community investing assets has been among community development credit unions, whose assets have nearly doubled since 2016. [3] In terms of the methods to realize the community investing, voluntary contributions or actions by companies to help communities in their areas of operation address their development priorities, and take advantage of opportunities created by private investment -in ways that are sustainable and support business objectives (Sequeira, 2010).
There is a list of eight best practices for companies to conduct community investment (See Table 2.4).
3 Available on: https://www.ussif.org/sribasics
Table 2.4 Eight Best Practices for Community Investment
Practice Details
Have clarity of purpose Identify key business drivers, prioritize areas where CI can make the biggest contribution to business objectives.
Build on business competencies and
resources
Think about the unique contribution that your company can make, the comparative advantages you naturally possess
Align internal functions to support CI
Strategic CI cannot be the domain of community relations only. It needs to involve all internal functions and units in a concerted effort, from human resources to R&D, procurement to security.
Be specific, not generic Engage in the issues that matter in the local communities in which you do business. Don’t adhere to a blanket approach that does not take local context into account.
Partner with the community
Engage the local community as a partner. Assess its assets and strengths, and use these to promote stakeholder-driven action.
Carefully select investment areas
Seek to invest at the intersection of government, community and company interests. This is where true shared value can be created.
Make good implementation choices
The trend today is toward hybrid implementation models that incorporate multi-stakeholder partnerships. Partners share risks and leverage resources, which leads to better reach and scalability and a greater likelihood of success.
Set goals Not just goals, but explicit, forward-looking targets–and then be gutsy enough to make them public.
Source:https://blogs.rhsmith.umd.edu/creatingvalue/uncategorized/8-best-practices-for-strate gic-community-investment/, author
For example, Green America, a national, not-for-profit, membership organization founded in 1982, whose mission is to harness economic power—the strength of consumers,
investors, businesses, and the marketplace—to create a socially just and environmentally sustainable society. They work for a world where all people have enough, where all communities are healthy and safe, and where the bounty of the Earth is preserved for all the generations to come. More details see annexes.
2.3 Forms of Ethical Investing
In fact, people are no stranger to the form of investment in the financial market. There are many types of investments available for people to choose from in financial market. For example, the forms of investing include mutual funds, ETFs (exchange-traded funds), individual stocks and bonds, closed mutual funds, real estate, various alternative investments, the combinations of mentioned above and so on. Correspondingly, as an ethical investment in the financial market, socially responsible investors also have a wide range of investments to choose, which enable investors to choose different ethical investing according to their own purposes and needs.[ 4 ] Therefore, according to the characteristics of different ethical investments, the form of ethical investment is mainly divided into four groups as following introduced.
2.3.1 Mutual Funds and ETFs
Mutual funds, which is a common investing form in financial markets, are profit-making corporate securities investment funds that are managed by professional financial practitioners of fund managers and openly raise funds to social investors to invest in the securities market. Mutual funds to buy stocks, bonds, commercial paper, commodities or derivative financial products to obtain interest, dividends or capital gains.
Similar to mutual funds, the ETFs (Exchange-Traded Funds) are SEC (United States Securities and Exchange Commission) - registered investment companies that offer investors a way to pool their money in a fund that makes investments in stocks, bonds, other assets or some combination of these investments and in return they receive an interest in that investment pool. Meanwhile, ETFs have several similarities to mutual funds. Like a Mutual Fund, an ETF is a pool or basket ofinvestments. However, ETF's many times have
4 LIVINGSTon, AMY. What Is Socially Responsible Investing (SRI)-Types & How to Get Started. Mo neycarsher.[Online]. [cit. 2018-12-30]. Available on: https://www.moneycrashers.com/socially-responsible-i nvesting/
lower expenses then a similar mutual fund in that there are no loads and the operating expenses are often lower. Many ETFs track passive market indexes like the S&P 500, the Barclay's Aggregate Bond Index, and the Russell 2000 index of small cap stocks and many other index.[5]
In terms of the ethical investing, there are hundreds of mutual funds on the market that use ESG criteria. US SIF publishes a list of more than 200 socially responsible mutual funds offered by its member firms, with information about both their financial performance and the criteria they use for choosing their investments. In addition, US SIF’s 2010 report on social investing trends identifies 26 exchange-traded funds (ETFs) that use social and environmental screens.[6]
Take one of the mutual funds as an example, The Aspiration Redwood Fund is a fossil fuel-free fund investing in own businesses that are leaders in their industry when it comes to caring about people, the planet, and their company's mission, which shows considerations of multiple environmental, social and governance (ESG) factors.[7] Aspiration Redwood Fund seeks total return, consisting of capital appreciation and current income by investing in companies based on various financial factors and fundamental sustainability factors such as environmental, social and governance performance of such companies.[ 8 ] And also, Aspiration Redwood Fund has no fossil fuel stock holdings (See Table 2.5).
5 NELLIE S. Huang.7 Great Socially Responsible Mutual Funds. Kiplinger. [Online].2016.Available on:h ttps://www.kiplinger.com/article/investing/T041-C009-S002-7-great-socially-responsible-mutual-funds.html
6 The Forum for Sustainable and Responsible Investment. US SIF Trends Report 2018 Release. [online].
October, 2018. Available on: https://www.ussif.org/trends
7 Aspiration Redwood Fund Official Website: https://funds.aspiration.com/redwood/
8 Available on: https://www.bloomberg.com/quote/REDWX:US
Table2.5 Aspiration Redwood Fund No Fossil Fuel Stock Holdings
Producers energy sector Consumers utility sector NO Carbon Underground 200
(Top 200 owners of coal and oil/gas reserves)
NO Macroclimate 30 (30 largest coal-fired utilities) NO Coal industry
(Coal miners and owners of coal reserves) NO Oil/gas industry
(Oil/gas producers and refiners, oil field services and equipment companies, pipeline
operators)
NO Fossil-fired utilities
(Electric utilities powered by coal and natural gas)
Source: https://fossilfreefunds.org/fund/aspiration-redwood/REDWX/fossil-fuel-investments/, author
Another example of ETFs is Vanguard FTSE Social Index, the fund's index includes companies with superior environmental policies, a strong hiring and promotion record for minorities and women, and a safe and healthy workplace. And the fund's index excludes companies involved with tobacco, alcohol, adult entertainment, firearms, gambling, nuclear power, and unfair labor practices. It also eliminates companies involved in nuclear power and firms that derive a significant amount of revenues from sales to the military. Socially conscious strategy can cause the fund to be more concentrated in certain sectors than a broad market index fund.[ 9 ] Take the fund Vanguard FTSE Social Index Fund Investor Shares (VFTSX) for example (See Table 2.6).
9 Vanguard Equity Index Group. Feb, 2019 Available on: https://investor.vanguard.com/mutual-funds/prof ile/overview/vftsx
Table2.6 Vanguard FTSE Social Index Fund Investor Shares (VFTSX) Portfolio Composition
Portfolio composition (Equity sector diversification)
FTSE Social Index Inv as of 02/28/2019
FTSE 4Good US Select Index (Benchmark)
as of 02/28/2019
Basic Materials 1.90% 1.90%
Consumer Goods 8.00% 8.00%
Financials 22.10% 22.10%
Health Care 17.00% 17.00%
Industrials 9.40% 9.40%
Oil&Gas 3.30% 3.30%
Technology 27.40% 27.40%
Telecommunications 0.10% 0.10%
Utilities 1.10% 1.10%
Source: https://fossilfreefunds.org/fund/aspiration-redwood/REDWX/fossil-fuel-investments/, author
As just mentioned, and data from this table shows, the fund is more concentrated in some certain sectors under the socially conscious stratege, which also means the higher risks than a broad market index fund.
2.3.2 Alternative Investments
In financial market, alternative investments are regarded not as the traditional types of investment as stocks or bonds. Because of the complexity and limited regulation of alternative investment , most assets are held by institutional investors and recognized high net worth individuals which included hedge funds, real estate, private equity, commodities，
managed futures and derivatives contracts. Alternative investments are sometimes used as a way to reduce overall investment risk through diversification. Some characteristics of alternative investments may include low correlations with traditional financial investments such as stocks and bonds. In recent years, the growth of alternative finance has opened up new avenues to investing in alternatives which include Equity crowd funding, Investor-led
crowd funding, SEIS (Seed Enterprise Investment Scheme) and EIS (Enterprise Investment Scheme) funds, Private equity, Infrastructure as an asset class and Art. Alternative investments as a domain is still evolving and maturing. While it is mainly considered to be a prerogative of the High Net Worth investors, there are also retail investors who are showing keen interest in them. The reasons why they choose alternative investments over traditional investments are mainly as following: Firstly, the low correlations to traditional asset classes like equity markets and fixed income markets act as a major advantage for alternative investments. Secondly, Alternative investments by virtue of their lower co-relation co-efficient offers better diversification benefits with enhanced returns. Thirdly, as compared to passive indexed investment, alternative investment calls for active management of funds.
Alternatives to traditional investments, such as hedge funds and property funds, are also into the SRI investing. According to US SIF (The Forum for Sustainable and Responsible Investment), alternative investment funds for SRI are growing at a dramatic rate.
In 2012, there were a total of 177 alternative SRI funds in the country managing about $38 billion in assets. By 2014, the number had jumped to 336 funds with $224 billion in assets.
For example, the Ethical Property Commercial Fund, which belongs to the real estate investment, are part of an international family of organizations. Built around strong management, values, transparency and a firm conviction that it is possible to make money whilst doing well, they have worked hard to ensure that our values remain strong today.
2.3.3 Community Investments
Community Investment (CI) is relatively special compared to other forms of investment. It is because the community investment’s origin is inextricably linked to ethical investing, it also becomes a very important form of ethical investing. The purpose of community investment is earning returns for investors while contributing to sublime things.
The function of Community investment is putting investment to work locally to provide safe as well as affordable apartments and houses, job opportunities, good qualified education, good health-care, financial counseling and other necessary community services. Since community investing includes various of activities, therefore there are many choices for community investment strategy. Here are some common strategies of community investments:
Buying real estate in poor communities, providing affordable housing for low-income tenants,
and revitalizing neglected communities. Direct investment in community development loan funds or pools of funds. Focus on community investment and invest in mutual funds that are socially responsible. Direct investment in municipal bonds to fund under-served communities to finance infrastructure, educational facilities, and public goods and services. Purchase stocks of listed companies that invest in under-served communities. This strategy is a less direct form of community investment, but it offers an option for investors looking for higher returns than fixed-income community investments.
For example, Inclusiv is the new name of the National Federation of Community Development Credit Unions. Inclusiv's mission is to help low- and moderate-income people and communities to achieve financial independence through credit unions. They believe that true financial inclusion and empowerment is a fundamental right. They dedicate to closing the gaps and removing barriers to financial opportunities for people living in distressed and under-served communities.[10]
2.3.4 Microfinance
Microfinance is a sustainable means of poverty alleviation leading to lasting, holistic development. Financial tools and training empower entrepreneurs to build businesses, support their families and transform their communities. It involves extending small loans, savings as well as other basic financial services to people that do not currently have access to capital. Microfinance is a key strategy in helping people living in poverty to become financially independent, which helps them become more resilient and better able to provide for their families in times of economic difficulty.
Broadly speaking, microfinance is a social movement whose goal is to provide financial services to as many poor or uncivilized people as possible on a global scale.
Services are durable, not limited to credit, but more comprehensive-Collecting savings, insurance, and remittances. People who support micro-finance believe that people can use it to escape poverty. For example, Kiva and Zidisha are two organizations that offer micro-loans to entrepreneurs in developing countries, while Kabbage focuses on small businesses in the U.S. Zidisha is the first online micro-lending community that directly
10 Inclusiv Official Website: https://ethicalproperty.com.au/about-us/
connects lenders and entrepreneurs - no matter the distance or disparity between them. We bypass expensive local banks and intermediaries that charge sky-high interest rates and offer a person-to-person platform that lets lenders and entrepreneurs communicate openly and instantly. Microfinance as a socially responsible investment class has gained increased attention. To some extent the popularity of micro-finance investment stems from the increased popularity of socially responsible investment. In addition, investor’s interest is driven by the increased profitability of institutions created by the drive towards commercialization. The fact that many of the world’s poor are still “unbanked” makes commercial microfinance a large potential growth market.
Another example is The Vancouver Sun features Vancitys microfinance programs.
Small business loans, a unique way of helping people who might not qualify for or need a conventional loan. Who don’t look at just credit history when considering a microloan, they also consider the ambition, character and determination. In addition, they also look at what one can achieve through financial literacy.
3 Development of Ethical Investing in Financial Markets
In order to discuss the ethical investing more deeply, the development of ethical investing will be summarized in this chapter, which including the macroscopic current situation around the world and the United States as well as China, two of the countries which process the worthy of discussing and comparing obviously.
3.1 Overview of the Ethical Investing Development Nowadays
In general, the financial markets of all the countries around the world mostly raised their attention to ethical investing, showing a positive tendency of ethical considerations while investing, by some newly created standards such as ESG (Environmental, social and governance) which is a concept also a gold principle that used to screen the investing choices by these three factors. Furthermore, the power of the third party and some voluntary organizations which are involved below can not to be underestimated for their contribution to the development of ethical investing.
3.1.1 Current Situation
On October 23, 2018 the Financial Times published an article which included a sentence that “Sustainable investing will be a core component for how everyone invests in the future.” It was announced by Larry Fink, the CEO of the world’s largest asset manager, BlackRock.[ 11 ] which proves that the development trend of ethical investing is very considerable nowadays. Moving into the 21st century, socially responsible investments continued to gain popularity. This reflected the growth of the ethical consumerism. The total value of the ethical market has been soaring since this time and these trends still remain today.
From the recent changes in the concept of ethical investors and the change of total value of ethical investment, both of the tables show the trend of its development.(See:Table 3.1) Since the development of the ESG investment concept, which is the new name of ethical investment that popular in recent years, more and more institutional investors have taken environmental, social and corporate governance factors into account in their investment assessments. Some well-known international organizations such as MSCI (Formerly Morgan Stanley Capital International and MSCI Barra) and FTSE (Financial Times Stock Exchange )
11 BlackRock Available on:https://www.blackrock.com/cn
have constructed a clear ESG evaluation framework and used. At the time, the ESG investment has been formed a certain scale. According to a report released by Morningstar in January 2018, the scale of global sustainable investment has grown to about $23 trillion, an increase of more than 600% over the past 10 years. ESG investment principles have been recognized by mutual fund funds, pension funds and other institutional investors. Besides, Bloomberg data shows that there are currently about 600 global ESG Public funds, accounting for nearly 60% of equity, and mainly concentrated in the United States and Europe.
Table 3.1 The Development of Ethical Investing From the Perspective of Total Value
Source: Best of Sustainable Finance, Bloomberg Reports. June 2017，author 3.1.2 Third Party and Voluntary Organization
Voluntary organizations of third-party institutions and responsible investors have played an important role in promoting the promotion of socially responsible investment concepts and promoting the improvement of market mechanisms and policy systems. In 1981, the SIF (International Social Investment Forum) was established in the United States to promote knowledge and ideas of socially responsible investment and strengthen capacity building by holding regular meetings, promoting related research, and popularizing knowledge. In 1989, the CERES (Environmental Responsibility Economic Union) was also established in the United States to promote sustainable development practices and solutions.
Region 2014($bln) 2016($bln) Growth Over
Period
Europe 10,770 12,040 11.7%
United States 6,572 8,723 32.7%
Canada 729 1,086 49%
Austria/New Zealand
1,148 516 247.50%
Asia(ex Japan) 45 52 15.70%
Japan 7 474 6.689%
5Total 18,276 22,890 25.20%
Under the initiative and guidance of SIF, the United Kingdom, the European Union, Japan, China, Africa and other countries and regions have successively established SIF to promote the development of socially responsible investment in the region.
The main goal of the above comprehensive organization is to promote the concept of green investment. In addition, with the continuous expansion of social responsibility investment, a series of specialized organizations and institutions have been created to promote the transformation of specific financial systems and the soundness of the market system. For example, CERES launched the GRI (Global Reporting Initiative) jointly with UNEP (United Nations Environment Programme) in 1997 to promote international standards for the preparation of sustainability reports. GRI has now launched a set of reporting standards on the performance of all aspects of the business, widely used in various industries, becoming one of the most influential non-profit organizations in the world; in 2003, some environmental NGOs (Non-Governmental Organization), fund investors and several banks in the United States The organization jointly established BankTrack, a non-profit organization that specifically tracks the operation of private banks and its impact on society and the environment, and promotes the transformation of the banking industry. In 2006, UNEP and the UNGC (UN Global Compact) initiated the establishment of the Principles for Responsible Investment (UN-PRI), aimed at improving the concept and system framework of socially responsible investment. On the basis of summarizing global investment practices, UN-PRI puts forward the ESG investment concept by taking the three aspects of corporate environmental performance, social responsibility and corporate governance as a whole, which greatly enriches the connotation of global responsible investment and builds global responsibility. In a word, these institutions and organizations play a very important role in ethical investing.
3.2 Development of Ethical Investing in the United States Financial Market
The United States, the country which process the most developed financial market in the world, also leading the world in the ethical investment reasonably. Hence, studying the development of ethical investing in the United States has an important reference significance for other countries. Therefore, the historical origins and reasons, also the advantages of the development of American ethical investing will be discussed below.
3.2.1 Origin and History of Ethical Investing in the United States
The origin of ethical investing, which can also be called SRI in the United States began in the 18th century. The Methodists, under the aegis of John Wesley, eschewed the slave trade, smuggling, and conspicuous consumption, and resisted investments in “companies manufacturing liquor or tobacco products or promoting gambling.” The Methodists were followed in 1898 by the Quakers, who forbid investments in slavery and war, and then by a group in Boston who founded the first publicly offered fund, the Pioneer Fund, in 1928. Most of these early strategies applied screens to eliminate “sin” industries. SRI ramped up in the 1960s, when Vietnam War protestors demanded that university endowment funds no longer invest in defense contractors. Gaining momentum in the 1970s, SRI’s long-standing principles progressed to represent a consistent investment philosophy allied with investors’ concerns. These ranged from avoiding the slave trade, war and apartheid and supporting fair trade, to issues more common today concerning the ethical impact of environment, social, and corporate governance (ESG).
In the process, several success stories emerged. In 1977, Congress passed the Community Reinvestment Act, which forbade discriminatory lending practices in low-income neighborhoods. Repercussions from Chernobyl and Three Mile Island nuclear disasters in the 1980s spawned anxiety over the environment and climate change, leading to the launch of the US Sustainable Investment Forum (US SIF) in 1984.
Fast forward to South Africa’s apartheid—literally “separateness”—designed not only to keep the country’s non-white majority apart from the white minority but also to decrease black South Africans’ political power. Dating back to the passage of the country’s 1913’s Land Act that forced black Africans to live in reserves and barred their working as sharecroppers, apartheid became an impetus to force corporations to divest from South Africa.
Again, student protestors played a role. In 1985, students at Columbia University in New York organized a sit in, demanding that the University cease investing in companies doing business with South Africa. The combined efforts of protests and responsible investing paid off—$625 billion in investments was redirected from South Africa by 1993. And the results were far reaching: upon his release from prison in 1990, Nelson Mandela worked with President F.W. deKlerk to develop a new constitution for South Africa, and both shared the
Nobel Peace Prize in 1993.
3.2.2 Development of Ethical Investing in the United States
The leading development of the United States’ ethical investing is inseparable from the United States’ superior financial market environment, humanistic spiritual environment, and many other factors. Three aspects of the advantages will be discussed as the relatively mature financial market, the humanities and cultural factors and the world leadership.
Relatively Mature Financial Market The developed and mature financial markets of the United States provide the foundation and space for the generation and development of ethical investment. In terms of market size, market structure, market freedom, credit instrument innovation, and monetary policy transmission, it is more mature and perfect than other countries, so the US currency market has become the most developed currency market in the world. Specifically, the maturity of the US financial market is reflected in many aspects. We can clearly see that there are various practitioners of ethical investing in the United States (See Table3.2), to which was contributed a lot by its relatively mature financial market far more than other developing countries.
Table 3.2 Practitioners of Ethical Investing in the United States
Practitioners Characteristics
Individuals Who invest—as part of their savings or retirement plans—in mutual funds that specialize in seeking
companies with good labor and environmental practices.
Credit unions and community development banks
Have a specific mission of serving low- and middle-income communities
Hospitals and medical schools Refuse to invest in tobacco companies Foundations Support community development loan funds and
other high social impact investments in line with their missions
Religious institutions File shareholder resolutions to urge companies in their portfolios to meet strong ethical and
governance standards
Venture capitalists Identify and develop companies that produce environmental services, create jobs in low-income
communities or provide other societal benefits Responsible property funds Help develop or retrofit residential and
commercial buildings to high energy efficiency standards
Public pension plan officials Who have encouraged companies in which they invest to reduce their greenhouse gas emissions and to factor climate change into their strategic
planning
Source: https://www.ussif.org/sribasics, author
The maturity of the U.S capital market system is reflected in all aspects. There are five national stock exchange markets in the United States. No matter the size of the company,
with the support of investment banks, there are opportunities for listing financing. A large number of institutional and individual investors of different sizes are looking for different investment targets in different stock markets according to their respective requirements and purposes, providing the US stock market with the largest capital base in the world, thus making the US stock market very active financing and M&A activities are frequent. The United States has no currency control, the US dollar goes in and out of the United States, and the policy encourages foreign companies to participate in investment behavior and become the world's financial capital. Listed companies can issue new shares financing at any time.
There is no limit to time and frequency, usually determined by the board of directors and reported to the securities regulator. The stock and bond markets have mature bond ratings and stock rankings, as well as multiple stock price indices. All the advantages of all financial markets provide a fertile ground for the development of ethical investment.
Humanities and Cultural Factors
As the history of American ethical investing mentioned above, the humanities and cultural factors has contributed a lot to the development of U.S ethical investing. The United States is a country highly developed in the humanistic spirit, which includes the respect for human rights and freedoms, protection of the environment and animals, emphasis on ecological green, environmentally friendly, and also the intangible norms of moral quality.
These most basic values are reflected in capital investment, and they have become the investment method based on morality.
The first ethical funds were based on strongly-held religious or ethical convictions that investors did not want their money funding companies involved in gambling, armaments, tobacco sales or pornography. But rather than simply apply a negative screen, the latest generation of ethical funds have a more positive remit, actively seeking to invest in companies that do good, rather than just avoiding those who don't. Many also have an environmental slant, supporting companies involved in green technology, pollution control, water desalination, and the use of natural resources more efficiently. Ditchfield says these appeal to a far broader spectrum of investors, "who are well aware of the challenges we face".
Over time, the ethical investing in the United States has gradually improved, expanded, and well-developed. It can be said that American culture promotes and develops the ethical
investing in the United States.[12]
Leadership in the World
The United States is the world's largest country, not only occupying an important position in the economy, but also having a world-leading position in politics and culture which laid a solid foundation for the sound development of U.S ethical investing. To some extent, countries all over the world are guided by the developed capitalism of the United States and develop their own national economy. Therefore, the development of ethical investment in the United States has also become a kind of propaganda and appeal, playing a leading and leading role in the world. And also, the United States not only plays a leading role in the global economic and political situation, but also plays a representative role in international common problems such as human survival and development, regardless of climate resources, ecological environment, animal protection, human rights issues, women and children issues, terrorist issues, religious issues and so on.
In terms of ethical investing, the United States itself did a good job. Specifically, the total US-domiciled assets under management using SRI strategies grew from $8.7 trillion at the start of 2016 to $12 trillion two years later, an increase of 38%. That's also 26%, or 1 in 4 dollars, of the $46.6 trillion In total assets under management. There’s a growing number of VC and private equity funds interested in these areas. Plus, assets invested with sustainable strategies are growing faster than the financial markets as a whole.
In 2019, U.S. stocks, as measured by the S&P 500, did even better, rising 13.6% for their best quarterly showing since 2009’s third quarter. (Sumit Roy, 2019). ETFMG Alternative Harvest ETF, which is the first pot-focused ETF to trade in the US The fund tracks an index of stocks across the globe that are engaged in the legal cultivation, production, marketing or distribution of cannabis products for either medical or non-medical purposes.
MJ also holds stocks Of companies that trade or produce tobacco or tobacco products, or fertilizers, plant foods, pesticides or growing equipment for cannabis or tobacco. In addition, the fund can hold pharmaceutical companies that produce, market or distribute drug products
12 SIMON Emma. Ethical Investment: Why it's not principles over performance. The Guardian [Online].
Oct,2013. Available on:https://www.theguardian.com/sustainable-business/ethical-investment-principles-perf ormance
that use cannabinoids. MJ can only At the time of launch, the fund did not include companies growing or distributing marijuana in the US due to its continuing prohibition at the federal level. The index provider uses publicly available sources To identify companies that derive more than half their revenue from cannabis-related activities.[13]
3.3 Development of Ethical Investing in Financial Market in China
Yet China as a fast-growing second world economy, it has a relatively slow development in ethical investing. Combined with China's national conditions, there are many reasons for further study. At the same time, China’s ethical investment has two sides as a coin, that the future of ethical investing has huge space to develop and also a huge challenge. Take these two countries as a comparison, which highlights the aspects what the China can learn from the U.S in terms of ethical investing and further explorations of the direction of China's ethical investing development.
3.3.1 Origin and History of Ethical Investing in China
On the one hand, the domestic ethical investment funds started late and developed slowly when comparing to developed countries, which resulted in the lack of variety in investment products. The XingQuan Green Fund, which is the first “Green Investment”, was established in China in 2011. Green investment is an important branch of socially responsible investment. More attention is paid to the performance data of the invested company in environmental responsibility. At present, there are 62 public fund products related to social responsibility and green investment, and the total management scale has exceeded 50 billion yuan (till June, 2018). Meanwhile, the good news is the scale of funds in China’s financial market also indicates that there is still a lot of space for developing in China's social responsibility fund industry. At the same time, only the bottleneck of the social responsibility investing be effectively solved can it contribute to the long-term development of China's ethical investing (Z.M Zhu, 2017).
On the other hand, the government’s supervision of ethical investing industry is also under-performing. On June 2, 2015, the AQSIQ (Administration of Quality Supervision, Inspection and Quarantine) and the National Standards Committee jointly issued the National
13 Available on: https://www.etf.com/MJ#overview
Standards for Social Responsibility, which is the first national-level standard document in the field of social responsibility in China. However, the introduction of this document did not meet the expectations and did not change the domestic chaotic situation of different social responsibility standards.[14] However, from the current situation, unified understanding and understanding is the result of a long-term effort. Standards development cannot solve the bottleneck of socially responsible investment.
3.3.2 Development of Ethical Investing in Financial Market in China
As the largest developing country in Asia, with the growing contradiction between economic development and environment and resources, the fulfillment of social responsibility has increasingly become the focus of attention of outstanding enterprises.
However, it is difficult to define the development of China's current ethical investing with simple good or bad, but in general China's ethical investing is still in its infancy. Because of the domestic people's concern for social responsibility is heating up, and consumers' awareness of ethical investing is gradually awakened, the research and publicity of domestic corporate social responsibility is increasing (Z.M Zhu, 2017). Objectively speaking, compared with the countries with more mature social responsibility investments especially as the United Kingdom and the United States, the development of ethical investing in China is still at a low level or even a stage that has not started yet. As mentioned in the Part 3.3.1, the Xing Quan Green Fund, was established in China in 2011, which is the first “Green Investment” in China. The investment principles of Xing Quan Green Fund is to comprehensively consider the economic, sustainable development, ethics and legal factors of the company's development. While pursuing investment performance, it will influence or promote the fulfillment of corporate social responsibility and promote the harmonious development of society. Data shows its performance is not bad as its initial developing stage, which shows that earning money while maintaining ethical standards is completely possible in China (See Table 3.3).
14 BEALES, Richard. China’s Impact Investment? That’s Mainly a Project for Foreign Investors. The N ewyork Times[online]. 2018, November [cit. 2018-12-30]. Available on: https://cn.nytimes.com/business/
20181116/china-esg-investment/dual/
Table 3.3 Performance of Xing Quan Green Fund (Until Nov, 2017) Resent half
a year
Recent 1year
Recent 3years
2015 2016 Until This year Net Worth
Growth Ratio(%)
33.61% 39.61% 117.36% -7.38% 70.8% 44.26%
P/B Ratio 6/1037 8/1037 24/552 537/107
5
92/608 17/1099
Annualized Return (%)
67.22% 39.61% 39.12% -7.38% 70.80% 44.26%
Source: Doing well while doing good: SRI. https://zhuanlan.zhihu.com/p/31542379, author Looking at the development of China's ethical investing, there are many unresolved issues. On the one hand, the amount of information disclosure in the social responsibility of listed companies is very limited and the quality is not high, the three key parts in the social responsibility operation system: Social responsibility index, socially responsible investment fund and related intermediaries are either just starting out or still in a vacant state. Therefore, a complete and organic operation system is required for the development of corporate social responsibility investment. There is still a long way to go, and all aspects of promotion and efforts are needed.
From the perspective of Chinese companies, one of the most important reasons is the insufficient understanding of the merit and importance of responsible investing and a general reluctance by companies to volunteer information on their investment practices could mean missed opportunities to improve risk management and enhance investment performance.
From the perspective of Chinese investors, China’s domestic share owners simply expect returns. Meanwhile, reliable information on environmental, social and governance, or ESG, factors is scarce, investors and companies talk past each other and there are plenty of other issues to worry about. How to use data is also very tricky for investors. For example, the MSG Emerging Markets Index and the FTSE Index (rich) ESG scores of the same global companies do not show much correlation. Investors must figure out whether these ratings are
