"Capital as such is not evil; it is its wrong use that is evil."
Mahatma Gandhi uttered those wise and simple words less than a century ago in a place and time when material goods were few and investment portfolios rare.
And while the message is timeless, diverting money from evil-doers in today's investment environment can be much more complicated.
When it comes to ethical investing the most basic targets to avoid are companies involved in weapons, alcohol, gambling, pornography, pollution and oppressive regimes. Some investors couldn't care less about the ethical implications. Others avoid them all. Some are opposed to one or two, and for a few, they might be part of a typical Saturday night. The point is: not all investors share the same values.
Spotting the culprits
Nailing down unethical companies is a challenge. Companies that produce and supply tobacco, alcohol and weapons are fairly easy to spot. The supply of pornography, as an example, can be linked to just about any cable TV or Internet provider.
The ethical lines get even muddier with polluters. It can be argued most resource companies pollute the environment in one way or another. Big multinationals with popular name brands often have the means to finance massive public relations campaigns to make their questionable operations appear green by giving lip service to environmental causes and concerns. Global energy giant BP provides a perfect example of how the power of PR can transform a careless Earth-ravaging oil spill in the Gulf of Mexico into a holy act of contrition and redemption.
When all else fails deep-pocketed companies involved in what are commonly considered unethical activities can release armies of lawyers to settle blossoming class action suits, employ delay tactics or wear down news media sources without the means to defend themselves.
In the end it's up to the individual investor to determine where to draw the line. You don't need hard evidence — just a whiff of sewage or a creepy feeling.
What you can do
Canadian regulators require registered investment advisors to make a form available to clients outlining ethical concerns — whether it be broad business practices, sectors or specific companies. A good investment advisor will be on the lookout and, in the case of a specific company, may be able to find a profitable company in the same sector to maintain the desired diversity in your portfolio.
Mutual funds and exchange traded funds (ETFs) are another matter. Most only disclose their top holdings and those holdings can change frequently.
Demand for socially responsible investments, or SRIs, has been growing and many investment companies are trying to meet that demand. There are several products available on the market that could line up with your values.
Returns and fees are generally comparable to their mainstream peers but critics argue that when options are limited there is an investment disadvantage. Companies producing and supplying alcohol, tobacco and weapons tend to pay high dividends. Raising revenue and dishing out generous dividends is a breeze when your product is physically addictive.
Toronto based Jantzi Research provides social investment research for a variety of funds, pension plans, endowments, and other institutional investors around the world. Some Jantzi funds are available to most investors under popular mutual fund company banners.
The Jantzi Social Index was launched in 2000 as a socially responsible version of the S&P/TSX 60 index. iShares Canada has incorporated the Jantzi Social Index into an Exchange Traded Fund that trades on the TSX under the symbol XEN. The fund is market-cap weighted with sixty stocks based on a series of parameters including environmental, ethical, social and aboriginal relations. The top ten stocks include Canada's big banks, Canadian National Railway, and energy companies such as Enbridge and Cenovus Energy. It has an annual fee, or MER, of 0.5 per cent of the total amount invested, which is comparable with mainstream ETFs.
Several Islamic socially responsible investment funds that follow Sharia precepts have come to market over the past few years. A team of portfolio managers often includes a council of Imams to help decide which investments are acceptable and which are not under Islamic law.
There are other faith-based funds and ETFs on the market although it's interesting to note a few have died a quiet death recently due to a lack of interest including the Baptist Values ETF, Catholic Values ETF, Lutheran Values ETF and the Methodist Values ETF.