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Profiting From Virtue

Ethical Investing Gains Force

By Father John Flynn

ROME, MAY 15, 2007 (Zenit) - Investors are increasingly looking for ways to link their money to ethical principles. In an April 30 report on this trend, the Financial Times newspaper cited data that puts the amount held in faith-based funds -- normally invested in by churches -- at around $17 billion.

A larger category is that of so-called socially responsible funds, whose assets have risen from $639 billion in 1995, to $2,290 billion in 2005. These are oriented on wider ethical principles, not necessarily linked to a specific religion.

George Rue, the chief investment officer for New Covenant Trust Company, a subsidiary of the Presbyterian Foundation, told the Financial Times, "Some people want to say it's a fad, but I am a believer that in this information age, people -- particularly younger people -- are caring more about the world and are not just focused on getting the biggest dollar return."

Among the best known names in this area are the Ave Maria mutual funds, which have $525 million invested in them. Monies in these funds are not invested in companies that violate the moral principles of the Catholic Church.

Another example cited by the Financial Times is the Timothy Plan mutual funds that are aimed at investors from the community of evangelical Christians. The 12 funds are currently worth $540 million.

According to an April 23 article published in the Christian Science Monitor, groups involved in family and moral issues are becoming more aware of the opportunities open to them through pressuring companies by means of their member's investments.

The article cited groups such as Women of Faith, a national Christian-oriented women's group based in Texas. At their summer events this year they plan to raise the issue of ethical investing. The American Family Association, reported the Christian Science Monitor, will also launch an initiative this summer, aimed at encouraging its 2.8 million members to avoid investing in companies that support anti-family practices.

Investment funds also exist for Muslims, explained the New York Times in its April 8 article on religious-based investing. The Amana income fund, for example, selects stocks according to the principles of Shariah, or Islamic law. It started operations in 1986, and another fund of the same group was founded in 1994.

Foundations feel pressure

The greater concern for ethical principles in investments has also put some philanthropic foundations in the spotlight. In January the Los Angeles Times ran a series of articles examining some of the investments by the Bill and Melinda Gates Foundation.

"In a contradiction between its grants and its endowment holdings, a Times investigation has found, the foundation reaps vast financial gains every year from investments that contravene its good works," stated the first article of the series, dated Jan. 7.

One of the incongruities cited by the Los Angeles Times was between the foundation's efforts to protect health in Africa, and with its investments in the oil industry. Oil companies active in Africa, the article affirmed, pollute at far higher levels than those allowed in the West, thus damaging people's health.

The Los Angeles Times calculated that around $8.7 billion of the foundation's assets, have been in companies that go against its charitable goals or philosophy.

According to information currently posted on its Web page, the Bill and Melinda Gates Foundation has $33 billion in its endowment. In addition, the renowned investor Warren Buffett has promised to donate about $31 billion of his personal fortune to the Gates Foundation.

Despite the adverse publicity following the series published by the Los Angeles Times, Bill Gates declared that the foundation's rules on investments would not be changing, reported the Financial Times on Jan. 13.

Buffett, in turn, has also been in the spotlight over his investments. At the recent annual meeting of his investment fund, Berkshire Hathaway Inc., a proposal asking the company to sell its $3.3 billion stake in PetroChina Co., a subsidiary of a Chinese government firm that has a major role Sudan's oil industry, was defeated by shareholders, the Los Angeles Times reported May 6.

Supporters of the proposal argue that the oil investments give economic support to the Sudanese government, which has come under strong criticism for human rights abuses committed in the Darfur region of the country.

"It's ridiculous when people say one major oil company is more 'pure' than another," said Buffett as reported by the Los Angeles Times on May 7.

Sin stocks

One query raised regarding ethical investing concerns the financial returns. A recent study found that what it termed "sin stocks" gave better results to investors. An April 10 press release published by the Sauder School of Business at the University of British Columbia, Canada, stated that some investors pay a financial price for not holding stocks linked to human vices.

The study, "The Price of Sin: The Effects of Social Norms on Markets," was conducted by Marcin Kacperczyk of the University of British Columbia, and Harrison Hong of Princeton University.

"While sinful stocks aren't necessarily good for the soul, they do deliver higher returns," said Kacperczyk. Nevertheless, institutions such as pension funds, universities, and religious organizations are more reluctant than other investors to hold sin stocks due to their exposure to public scrutiny.

The Christian Science Monitor looked at the question of returns in ethical investments in a March 26 article. The article cited a study by Morningstar, an investment research group, which found that investors in socially responsible funds tend to feel the pain of plunging markets even more than other investors do. Plus, when stock prices rise the ethical funds do not benefit as much as other funds.

The Wall Street Journal was a bit more optimistic in a March 20 article. Examining the category of faith-based funds, they concluded that their performance is improving. The article also allowed that if you feel strongly about your faith, then the products offered by faith funds could be a good match.

Moreover, some faith funds have very solid returns, as the Associated Press reported Jan. 2. The Islamic Amana Trust Income Fund saw a return of about 19.3% in 2006, while the Ave Maria Catholic Values Fund posted a return of about 14.2% in the same period.

They were beaten, however, by an appositely named "Vice Fund," that invests in alcohol, tobacco, arms and gambling. According to the Associated Press, the Vice Fund showed a return of about 23.2% last year.

Shades of gray

Deciding what is an ethical investment is not always a black and white choice, as an April 7 article by the New York Times explained. One example the article cited was that of oil companies. Exxon Mobil has long been excoriated for its combative role regarding global warming. By contrast BP was considered to be environmentally friendly, and acceptable for ethical investors.

Notwithstanding such views, the 2005 explosion in a BP refinery in Texas led to a realization that the company had a poor safety record. Exxon Mobile, on the other hand, has a much better record and has not had a serious oil spill since 1989.

The New York Times article also questioned the ability of some ratings groups, which funds rely on to tell them whether a company is ethical or not, to accurately evaluate the situation of large firms active in many countries.

The Gospel needs to be proclaimed in the complex worlds of today, including those of business and finance, observes the Compendium of the Social Doctrine of the Church (No. 70). A task an increasing number of investors are taking up with their decisions on where to put their money. Although not exempt from difficulties, it promises to be a trend that will continue to gain force.

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Virtue, Flynn, Money, Invest, Funds, Ethics, Principals

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