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Morals, markets and money
Dedicated to my daughter Francesca Rose I...
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Prelims/Morals, Markets
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Morals, markets and money
Dedicated to my daughter Francesca Rose Isabelle Lewis (b. 1994) and in memory of my daughter Georgia Helen Charlotte Lewis (b. 1984 died 1990) and my father Albert Charles Lewis (b. 1902 died 2001)
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In an increasingly competitive world, we believe it’s quality of thinking that will give you the edge – an idea that opens new doors, a technique that solves a problem, or an insight that simply makes sense of it all. The more you know, the smarter and faster you can go. That’s why we work with the best minds in business and finance to bring cutting-edge thinking and best learning practice to a global market. Under a range of leading imprints, including Financial Times Prentice Hall, we create world-class print publications and electronic products bringing our readers knowledge, skills and understanding which can be applied whether studying or at work. To find out more about our business publications, or tell us about the books you’d like to find, you can visit us at www.financialminds.com For other Pearson Education publications, visit www.pearsoned-ema.com
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Morals, markets and money Ethical, green and socially responsible investing ALAN LEWIS Professor of Economic Psychology, University of Bath, UK With a contribution from John Cullis and Philip Jones
An imprint of Pearson Education London ■ New York ■ Toronto ■ Sydney ■ Tokyo ■ Singapore ■ Hong Kong Cape Town ■ New Delhi ■ Madrid ■ Paris ■ Amsterdam ■ Munich ■ Milan ■ Stockholm
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First published in Great Britain in 2002 © Pearson Education Limited 2002 The right of Professor Alan Lewis to be identified as Author of this Work has been asserted by him in accordance with the Copyright, Designs and Patents Act 1988. ISBN 0 273 65323 7 British Library Cataloguing in Publication Data A CIP catalogue record for this book can be obtained from the British Library. All rights reserved; no part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise without either the prior written permission of the Publishers or a licence permitting restricted copying in the United Kingdom issued by the Copyright Licensing Agency Ltd, 90 Tottenham Court Road, London W1P 0LP. This book may not be lent, resold, hired out or otherwise disposed of by way of trade in any form of binding or cover other than that in which it is published, without the prior consent of the Publishers. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that neither the author nor the publisher is engaged in rendering legal, investing, or any other professional service. If legal advice or other expert assistance is required, the service of a competent professional person should be sought. The publisher and contributors make no representation, express or implied, with regard to the accuracy of the information contained in this book and cannot accept any responsibility or liability for any errors or omissions that it may contain. 10 9 8 7 6 5 4 3 2 1 Typeset by Northern Phototypesetting Co. Ltd, Bolton Printed and bound in China The Publishers’ policy is to use paper manufactured from sustainable forests.
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Contents
List of figures
ix
List of tables
ix
Acknowledgements
x
1 Ethical investing: definition and growth
1
Theory, policy and straw
5
REM revisited
8
About this book
9
2 History and aspiration
13
Friends Provident Committee of Reference
20
Other funds and activities
22
A critique
25
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CONTENTS
3 Profit doesn’t have to be a dirty word
29
Principles and performance
32
Authenticity
37
Making a difference
38
The Friends Provident longitudinal study
40
What the papers say
43
The product
45
Performance revisited
46
The market
49
Telling stories
51
4 Ethical investors: nature, perceptions and preferences
53
About the survey
56
What are ethical investors like?
57
Saints and sinners
60
Risk and return
61
Elaborations
66
Attitudes
67
An experimental approach
75
Recapitulation
78
5 Mixed motives
81
Ten Shared Interest
85
Ten EIRIS
86
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CONTENTS
Mixed motives
88
Focus groups
90
Mixed motives revisited
95
Can ethical investing make a difference?
96
Active engagement
98
Washing up
101
6 A challenge for economics?
105
No sweat
108
Feeling the heat
113
When ‘homo economicus’ meets ‘homo realitus’
117
Stock market analysis
128
Some contradictions and conundrums
134
7 Policy, politics and behavioural finance
139
Other developments
149
Making a difference?
151
More on the role of governments in creating a ‘good’ society
156
SRI and corporate social responsibility (CSR)
161
Types, multi-selves and the rest of it
164
More about mixed motives and the ubiquitous ‘market’
168
Manipulation?
169
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CONTENTS
Behavioural finance and social psychology
170
From this moment on
173
Appendix: The Morals and Money Project, Survey of Ethical Investors
177
References
199
Index
211
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List of figures 6.1
Preference maps
110
6.2
The ‘Greenish’ investor
112
7.1
Past and future
174
List of tables 4.1
Factor analysis and descriptive statistics of motive and attitude items
4.2
70
One-way ANOVA comparing the motives and social attitudes of investors with ethical investment choices with varying rates of return
4.3
74
Ethical investing with falling returns compared to proportion invested ethically
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Acknowledgements
T
his research was funded by the Economic and Social Research Council (Grant No. LI22251017) awarded to Alan Lewis and Adrian Winnett from Bath
University and Paul Webley from Exeter University. The commendable Craig Mackenzie was the research officer on the project. The grant itself was part of a larger ESRC programme, on Economic Beliefs and Behaviour ably chaired by Peter Taylor-Gooby. Besides those already named, many people have helped along the way, including the great and the good at Friends Provident, NPI, EIRIS, UKSIF, the Cooperative Bank plus many activists and movers and shakers. Steve Fineman also took the trouble, and at short notice, to read parts of the manuscript – as always, any errors or misjudgements in the text are mine and mine alone. Alan Lewis .... x ....
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CHAPTER
1
Ethical investing: definition and growth
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thical, green and socially responsible investing is
E
becoming more and more popular in the UK. The first UK ethical fund was launched by Friends Prov-
ident ‘Stewardship’ in 1984. There are now about 44 ethical funds totalling around £3 billion in assets. This is not an insignificant amount of investment involving some 200,000 individual investors. A variety of financial products can now be acquired including personal equity plans, life and health insurance, endowment mortgages, pensions and ethical unit trusts. The usual concerns when investing are risk and return: one may have a portfolio comprising a mixture of relatively safe, average return investments combined with others which are more volatile; the stew will depend on one’s preferences. The ethical investor, on the other hand, not only wants to know about risk and return but the .... 3 ....
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nature of the businesses which generate the wealth as well; it matters where the money comes from. In the UK, the Ethical Investment Research and Information Service (hereafter EIRIS) can suggest to investors the companies they might wish to avoid. The ‘avoidance’ criteria which seem to matter most include steering clear of companies which manufacture weaponry; those which pollute the environment, test their products on animals; are involved in the production and distribution of tobacco or alcohol; companies which exploit labour, especially child labour; companies associated with undemocratic and oppressive regimes. The growth of ethical investment is a world-wide phenomenon. In the United States of America, Socially Responsible Investing (SRI) has a longer history and a stronger base in institutional investment (e.g. pension funds). According to a trends report of the Social Investment Forum (SIF, 1999): One out of every eight dollars under professional management in the United States today is part of a socially responsible portfolio. The $2.16 trillion being managed by major investing institutions (including pension funds, mutual fund families, foundations, religious organizations and community development financial institutions) .... 4 ....
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accounts for roughly 13% of the total $16.3 trillion in investments assets under management in the US. (www.socialinvest.org/) This is serious money with serious consequences and because of this alone warrants attention and research. This growth also raises important theoretical questions and policy issues.
Theory, policy and straw Central to neo-classical economics is the assumption of rational economic man (hereafter REM). REM is motivated by self-interest and seeks to maximize his welfare. REM is a very useful assumption in economic modelling as it offers a parsimonious description of the economic actor. A huge literature has been dedicated to the notion of REM and the reader is directed elsewhere.1 What most concerns us here is that ethical investing could be seen as a challenge to neo-classical economics and rational choice theory. The main reason is that ethical investors seem to attach considerable importance to non-monetary aspects in their investment decisions beyond the consideration of risk and return alone.
1
For example, Hollis and Nell (1975); Marr and Raj (1983).
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■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■
Rational economic man is motivated by self-interest and seeks to maximize his welfare ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■
Economists like to explain and predict using economic variables exclusively, e.g. comparative interest rates, but will this do when it comes to ethical investing? Instead devotees of economic psychology have argued that beliefs, attitudes and values are central to any comprehensive analysis of economic relationships (Lewis, Webley and Furnham, 1995). Ethical investing is a prime case study for assessing the persuasiveness and applicability of these competing explanations (Lewis and Cullis, 1990; Cullis, Lewis and Winnett, 1992). To put it starkly, economic psychologists would see this as an example of people putting their money where their morals are, bringing their values systems in line with their economic behaviour. In contrast, economists and other commentators might well view the rise of ethical investing as a mere fad or fashion, where the ‘characteristic’ of ‘ethicalness’ is simply a novel way of marketing investment products. If one were to prefer the approach of economic psychology, compared to neo-classical economics, ‘prefer.... 6 ....
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ences’ (read: moral, values, beliefs, etc.) would need to be the chief explanatory variables. So where have these changes in preferences come from? There is evidence from public opinion polls that people have become more concerned about environmental issues in recent years as well as the role of corporations in promoting welfare. In tandem with these changes have been debates about the appropriate role of governments and the nature of ‘markets’. On the one hand, the ‘Chicago’ and ‘Virginia’ schools of economists (Becker, 1975; Stigler, 1975; Coase, 1960; Buchanan and Tullock, 1965) have championed ‘markets’ as liberating agencies which can solve almost all of the ills of society in the long run, including bribery, discrimination; even that ‘free’ markets make democratic systems inevitable or universal (Bowie, 1994). On the other hand, there are the devotees of government ‘intervention’ who point to ‘market failure’. Markets may fail because there is a lack of competition and response to consumer demand; that income inequalities are created and there is inadequate provision for welfare. Following this view, markets cannot be left to themselves and require government legislation to curb excess, corruption and inequality (Cullis and Jones, 1987). For the Chicago school, it is best to leave the market to its own devices. In a ‘free’ market, ethical investors are able to express their preferences like anyone else, and, if appro-
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■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■
Devotees of economic psychology have argued that beliefs, attitudes and values are central to any comprehensive analysis of economic relationships ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■
priate, the market will respond to these preferences – environmental problems, for example, will be more successfully addressed this way. The ‘interventionalists’ will see things differently. Expedient businesses will pollute, employ child labour, evade taxes and all the rest of it as long as they can get away with it – legislation is required. The middle ground, or a ‘third way’, is to recognize that ethical investors can influence markets for the common good and all they need is a little encouragement.
REM revisited For Etzioni (1988), REM is not a politically neutral assumption. The problem is that especially among policy makers, REM is regularly and implicitly regarded as an accurate description of the way people really are (Le Grand, 1997). When this happens moral aspects of both individual motivations and the moral dimensions of mar.... 8 ....
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kets are underestimated – thereby diminishing ‘human nature’ and reducing the workings of markets to base motives. A further problem is that a belief in the reality of REM may produce an acceptance of selfishness and individualism as opposed to a concern for others, a sense of social identity and social responsibility. Ethical investing is embedded in this debate. Are markets moral? Should they be moral? Or are they best left to the self-interest of the parties concerned (recalling Adam Smith’s
metaphor
of
the
‘invisible
hand’:
Smith,
1776/1937). The rational economic person and the altruist may both be made of straw: the quest of a new economic psychology perhaps should be to marry the best qualities of each model; they need not always be in competition. Our first unmonitored reactions may be base but we can be reflective as well: hell need not be the inevitable destination for those with good intentions.
About this book This book is based on research funded by the Economic and Social Research Council under the UK government’s Economic Beliefs and Behaviour Programme. The grant was awarded to Alan Lewis, Paul Webley and Adrian Winnett, and the work draws on the influence of these authors .... 9 ....
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as well as the enthusiasm and dedication of the research officer on this part of the programme, Craig Mackenzie. The book addresses the following questions: ■
Are people prepared to put their money where their morals are? Are people prepared to take a loss?
■
To what extent is ethical, green and socially responsible investing an example of this?
■
Are these funds ‘authentic’ or are they just a novel way of promoting financial products?
■
Are ethical investors cranks or are they the vanguard of a growing movement?
■
What do ethical investors think they are doing? Will it do any good?
■
What are the policy implications? Can investors have a desirable influence on the market, e.g. by not investing in companies that pollute? The broader questions are:
■
Are markets moral?
■
Do we need a new economic psychology which combines the model of the rational economic person with a moral dimension? The material reported here has been collected using a
variety of methods. Chapter 2 examines the history of UK
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ethical funds based on one-to-one interviews with the ‘great and the good’ as well as observation of policy meetings. Chapter 3 relies on an analysis of newspaper articles about various ethical and SRI funds as well as the publicity material produced by these funds. How are these funds marketed? What do they claim? How are they viewed by the financial press? Chapter 4 reports on the largest ever questionnaire survey of UK ethical investors (N = 1,146), which details the characteristics of ethical investors, their perceptions of current risk and return and whether or not they would be prepared to take a loss in order to preserve their principles intact. Chapter 4 also draws on computer simulations of changes in the investment climate and how investors react to them. What ethical investors say they are trying to achieve and how ‘mixed-motives’ are construed are the subjects of Chapter 5, drawing on evidence gleaned from questionnaires, telephone interviews and focus groups. The economists Philip Jones and John Cullis evaluate the evidence from the perspective of their discipline in Chapter 6: can this all be ‘explained away’ or is a new model of the economic actor (or investment markets generally) required? The concluding chapter speculates on recent policy initiatives, broad theoretical questions and priorities for future research.
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CHAPTER
2
History and aspiration
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he history of ethical investing in the UK is bound
T
up with Friends Provident ‘Stewardship’ launched in 1984, the first UK ethical trust. Even though
there are now around 44 of these trusts, ‘Stewardship’ is still the largest by some distance. Friends Provident was very helpful to us on the project, and with certain provisos, allowed the research officer on the morals and markets project, Craig Mackenzie, access to documents, relevant meetings and the opportunity to interview key personnel – for which we are most grateful. This access also helped Craig to complete a PhD (as part of the project) on which the first part of this chapter draws (Mackenzie, 1997). As with most histories, comprehension relies on the interplay between tradition, the initiatives of key players (institutions and individuals) and a changing environment. In the current case the tradition is religious tradition; key .... 15 ....
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players, the church, and individuals such as Charles Jacob and Trevor Jepson; the changing environment, increasing concern about ethical and environmental issues in the marketplace and the modifying role of government. There are, of course, many references to money and morality in the Bible and usury is forbidden in Jewish law. This relationship between money and morality was of considerable importance to John Wesley, who preached regularly in the eighteenth century on themes such as ‘Earn all you can; But not at the expense of conscience’. It is clear that not only the Society of Friends (Quakers) but also the Methodist Church have been highly influential. The Vietnam War and the apartheid system in South Africa, in particular, triggered action among a number of church investment funds in the 1960s, but this did not result specifically in the set up of an ethical unit trust. It was Charles Jacob, in 1973, a leading light on financial matters in the Methodist Church, who made the next step forward. He gained support from Richard Rowntree of the Joseph Rowntree Social Services Trust together with Jeremy Edwards, of First Investors, an asset management company, to construct a proposal for a trust called ‘Stewardship’. The proposal not only championed the avoidance criteria familiar in US mutual funds at the time but also the need to invest in companies that were making a positive contribution to society; a policy inspired by the ‘Parable of
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the Talents’ in St Matthew’s Gospel (Matthew 25 14–29). Among the objectives in the original proposal is one about the perceived ‘supply’ and ‘demand’ characteristics of the period: … to provide a suitable avenue through which those members of the public already conscious of their social responsibility [my emphasis] are enabled to invest in equity (in some cases for the first time) [again, my emphasis] without disturbing conscience and with the diversification advisable for their requirements. (Mackenzie, 1997: 64/5) This quote implies that ‘consumer demand’ was already present, that the appropriate product was not available and finally that there might, up to that point, be a resistance to investing at all because of the lack of a suitable ‘ethical’ vehicle. The initial idea was hindered by the Department of Trade which took the view that it was a legal responsibility of unit trusts to produce reasonable financial returns, and that restricting a portfolio on non-financial grounds would jeopardize that commitment. Trevor Jepson, chairman of Christian Concern for South Africa (CCSA) drafted the plan for an ‘ethical investment information service’ in 1981. The Ethical Investment
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Research and Information Service (EIRIS) was finally initiated in 1983 with backing from churches and charities: Quakers and the Methodists were well represented, as would be expected, and so were the Church of England, the Presbyterian Church in Ireland and Wales, as well as the Joseph Rowntree Trust and the charity Oxfam. In the first EIRIS newsletter it was made clear that its role would not only be in providing information but also: … to promote a wider public understanding of, and debate on, corporate social issues. (EIRIS, 1983) … which resonates with a lobbying ethos. The game now expands from responding to economic demand to stimulating that demand. How different is this from the brief of a marketing department in any commercial operation? The difference might be that this marketing is motivated by other things besides wealth maximization: certainly the advent and continued expansion of EIRIS means, in the terms of economists, that the search for the relevant information for existing and potential ethical investors becomes less costly. Finally, in 1978 a new application for a Stewardship fund was made to the Department of Trade and Industry. With the support of the chairman of the Stock Exchange, Sir Nicholas Goodison, the application was successful. A
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■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■
The Ethical Investment and Research Information Service (EIRIS) was initiated in 1983 with backing from the churches and charities ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■
timely meeting between Friends Provident and the Rowntree Trust Committee made the prospect real. It might appear that Friends Provident, established as a mutually owned ‘friendly society’ would be the obvious place for an ethical fund. Set up by two Quakers, Samuel Tuke and Joseph Rowntree in 1832, Friends Provident was managed according to the beliefs of the Religious Society of Friends: no investments were placed in companies involved in arms, alcohol, tobacco and gambling. Although originally restricted solely to Quaker members, Friends Provident has become increasingly secular over time. By 1980 many investors were not Quakers; Quakers were even not in the majority on the board and the exclusions were dropped. These moves created some dissent among the Quaker board members and the advent of the Stewardship fund meant that Quaker principles could still be maintained without them applying to Friends Provident as a whole: the time was ripe for Stewardship.
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Following the launch in 1984, there was considerable cynicism in the City of London – Stewardship was even known for a time as the ‘Brazil’ fund as it was considered ‘nutty’. The rapid growth of Stewardship (and the emergence of others, e.g. Credit Suisse in 1986; Abbey Life Ethical in 1987; Jupiter Ecology in 1988) has meant that many have had to eat their words (and choke on their nuts). Not that the cynicism has necessarily departed. While in the early days the funds were laughed at because of their naïve assumption that you could make money doing good, having now made money, the suspicion is that the funds cannot truly be ethical.
Friends Provident Committee of Reference Friends Provident has a Committee of Reference to develop Stewardship ethical policy. Positive and negative criteria are discussed and the evidence supplied by EIRIS evaluated (of which Stewardship is the largest client). Ethical criteria are not applied mechanically as the positive aspects of some companies might sometimes outweigh the negative. Because of this, individual companies are occasionally discussed in some detail. There are at least two interpretations of this. The first is that this approach recognizes the complexity of the questions raised – that there are no quick fixes. The second interpretation might point .... 20 ....
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to the ad hoc nature of decision making and possible inconsistencies. What is clear is that the Committee of Reference controls a good deal of Stewardship policy, and when an acceptable list of companies is arrived at, the fund managers have to work with this (and not add any of their own). It looks again as though the supply side is an important aspect of the workings of Friends Provident. One member of the committee is responsible for direct communications with policy holders and the public, and EIRIS regularly reports on changing ‘consumer’ preferences. Yet, there seems little systematic appraisal of this consumer data or response in terms of changing the ‘product’ as a result. This is quite unlike what one might expect in a purely commercial organization, but it must be remembered that the product is a very successful one. This commitment to principles is laudable, but it perhaps explains the proliferation of other funds more in line with changing values, e.g. from the late 1980s at least 10 funds have been specifically marketed as ‘green’ funds (including Jupiter Ecology) as a response to growing concern about environmental issues. Rather than using a description of the decision-making process as ad hoc, Mackenzie (1997) draws on an analogy with the law: much of Stewardship’s policy is not ‘statute law’ but ‘case law’ depicted in the Committee of Reference minutes. Although I do not believe that Mackenzie (1997) uses the word, it is my impression that these decisions are .... 21 ....
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tinged with ‘pragmatism’, an effort not to make the profitseeking fund managers’ task too difficult. The Stewardship’s ethical investment policy is full of such phrases as ‘would not normally invest in’; ‘would preferably not invest in’, where consumers might expect ‘would definitely not invest in’ to be more common.
Other funds and activities The ‘acceptable list’ supplied by the Stewardship Committee of Reference is unique among ethical unit trusts (EUTs). Instead many EUTs rely on the information supplied by EIRIS using secular as well as religious criteria. Often these criteria can be applied mechanically without a committee of reference. Criteria regularly contain quantitative compromises, for example, one might not exclude a company where ‘only’ 10% of the turnover is in the ‘offensive’ category, the main business lying elsewhere. Nevertheless, about half of other EUTs have ‘advisory committees’, although these generally are not as involved in ethical policy making and nor do they meet as regularly as the Friends Provident Committee of Reference. Over half use EIRIS, and a minority have in-house research teams; NPI completes the hat trick with an inhouse research team, an advisory committee, and a contract with EIRIS.
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Besides the EUTs, there has been a growth in other related activities, including ‘ethical banking’. In the Triodos and Shared Interest banks, for example, depositors accept an interest rate below that offered by ethically ‘neutral’ banks in order to see the money lent in socially responsible ways. The Co-operative Bank, a more ‘mainstream’ bank, although small has gained some competitive advantage through advertising its ethical claims, profiting in particular from deposits from charities, volunteer groups, local authorities, schools and education departments as well as from individuals. The Co-operative Bank was probably set for takeover in the late 1980s and something needed to be done. One cannot label the Co-operative Bank as getting on to some kind of bandwagon as it can claim that ethical banking draws on its co-operative heritage. Because of this, the Co-op had a much smaller number of customers from manufacturing industries on its books at this time, so any losses incurred by closing some of the more suspect of those accounts was far outweighed by the new ethical business acquired in the 1990s. The Ecological Building Society has also had some success, on a smaller scale, gathering funds for mortgages for environmentally friendly homes or for renovations of older properties which other building societies shirk at. Independent Financial Advisers (IFAs) are one of the catalysts in the investment process. Investors may specifi-
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cally ask about opportunities to invest ethically – and this makes the job of the IFAs easy. It also helps when socially responsible funds are performing well; then the IFA can recommend them in any case. And in the real commercial world IFAs receive commission when products are sold; ethical products are no exception. In chemistry a catalyst assists a chemical reaction but is itself unaltered. This analogy is not quite right, as some IFAs have changed, themselves specializing in socially responsible commodities (e.g. Holden Meehan). ‘Ethical’ IFAs can offer a service to customers that individual EUTs cannot as the IFA can find out about the preferences and political views of the investor and then provide him or her with a tailor-made portfolio. From the informal interviews conducted on the project with some of the early protagonists in the movement, there is some agreement about their part in it. Religious convictions of various kinds are often the driving force but so are more secular convictions, especially those associated with environmental problems. The activists, if they do not always know each other, know of one another. There is a shared belief that socially responsible investment can make a difference, although this tends to take many forms. The first is that size matters, the magical figure being around 10% where at this level ethical investing can actually affect share prices. The second is a recognition that this is unlikely and that
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■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■
Religious convictions of various kinds are often a driving force but so are more secular convictions, especially those associated with environmental problems ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■
instead the way forward is through ‘active engagement’; lobbying companies to change rather than just withdrawing funds. One interviewee even said there had been instances where companies had contacted the EUT enquiring why they had been excluded. It could be suggested that companies might wish to advertise the fact that an EUT invested in them, that this would be good publicity. The third way is a belief, among protagonists that through leadership and example that they are encouraging a ‘greener’ and more socially responsible corporate culture. Linked to these notions of cultural change are the beliefs that participants are contributing to a new kind of economics and a novel variant of ‘naked’ capitalism – capitalism with a ‘social heart’.
A critique There is some scepticism among ‘ordinary’ investors (evidence gained from focus groups, most of which is discussed .... 25 ....
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in Chapter 5). These individuals feel that screening will be incomplete as most of the larger firms, even if they pass the relevant ethical ‘test’, will be dealing, somewhere along the line, with companies that would fail it. The Friends Provident Committee of Reference agrees that there is no such thing as a perfectly ethical company. Stewardship’s mission is to invest in companies which on balance make a positive contribution to society. This means that there will be investments in companies which do some minor harm, provided that this is outweighed by the good done (Mackenzie, 1997: 97). Fund managers generally recognize that investments are not simply ‘black or white’. This lack of clarity puts off a number of investors, the exercise seemingly doomed to failure. In a critical research report Digby Anderson (and others in the Social Affairs Unit) pose the question: What has ‘ethical investment’ to do with ethics? (Anderson, 1996). The main point of issue is that ethical principles are rarely if ever stated and the criteria used are highly selective. The complexity of moral arguments are ignored. Roger Scruton chooses the issue of testing pharmaceutical products on animals to make his point: Are we to test these products on human beings? Use them without testing? Give up pharmaceutical research altogether? Would those who oppose investments in these areas refuse drugs tested on .... 26 ....
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animals when, without them, they will not recover from a serious illness? To assume that this complex ethical issue can be brought to a conclusion, simply by refusing to invest in firms which test drugs on animals, is to adopt a frivolous and self-indulgent response to a real moral problem – and that itself is immoral. (Scruton, in Anderson, 1996: 14) Scruton also takes the view that ‘ethical’ is just another name for fashionable causes: Smoking, it seems, is the greatest of all immoralities for modern people – in comparison with which adultery, deception, sponging off others, and sinking into sloth and moroseness in front of a television are regarded as mere peccadilloes. Whether one accepts these criticisms or not, it is true that labelling a fund as ‘ethical’ is largely a self-awarded title, Anderson prefers ‘ethically simplistic investments’ or ‘investments reflecting fashionable causes’ as alternatives. Another of Anderson’s ‘improved’ descriptions is ‘investments reflecting investors options’. It seems to me that a market driven by demand may well see new investment products which reflect causes other than the ones currently advocated. One can already see a diversification in the market which reflects, often, the different visions of .... 27 ....
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the ‘protagonists’ and ‘crusaders’. The ‘ethical’ market has both ‘supply-side’ and ‘demand-side’ elements, but there is little evidence, especially among the originators, that the label ‘ethical’ is being used as a marketing ploy. There might be grounds for concern with a handful of some of the newer ‘ethicals’ which do not use EIRIS and have no ‘in-house’ researchers or advisory boards.
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CHAPTER
3
Profit doesn’t have to be a dirty word1
1
Friends Provident Stewardship publicity from at least 1989.
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he first part of this chapter is based on two data
T
sets. Number one is a content analysis of nine brochures published by a variety of ethical unit
trusts, namely: the Co-operative Bank’s Ethical Unit Trust (1994); Skandia Ethical Managed Funds (1996); Clerical Medical Evergreen (1996); the Ethical Trust of Abbey Life (1994); NPI Global Care (1996); the Henderson Ethical Fund (1996); Friends Provident Stewardship (1997); Jupiter Ecology (1997); the Scottish Equitable Ethical Trust (1995). This is a cross-sectional snapshot providing a flavour of the marketing material during this period. The second takes a more longitudinal perspective tracing a wide range of Friends Provident Stewardship brochures, leaflets and newsletters from 1987 through to 1995. In both data sets the following topics are explored. What do the brochures have to say about the relationship between .... 31 ....
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finance and ethics? What kinds of claims are made about authenticity and performance and the influence ethical investments can make on a wider society?
Principles and performance Being ‘positive’ is frequently underlined in this marketing material: … the Bank actively seeks to support those companies making a positive contribution to society. (Co-operative Bank, EUT) And … seeking out those companies which are making a positive contribution to the environment … (Clerical Medical Evergreen) Avoidance criteria are mentioned by Friends Provident Stewardship, but one hears about the positive contributions first: Put simply, Stewardship seeks to invest in companies which make a positive contribution to society, and avoid those which harm the world, the people or wildlife.
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The mention of ‘wildlife’ probably reflects the heightened concern with environmental issues during this time,2 as there seems no obvious link to Quaker doctrine. Skandia Ethical Managed Funds, one of the later players, also shows the green card: … will seek to invest in companies which demonstrate a positive contribution to society and the environment. It is informative that these claims about being ‘positive’ are prominent when most EUTs (certainly in the 1990s) were more driven by ‘avoiding’ ‘bad’ companies. Investing ethically in a socially responsible or in an environmentally responsible way appear early on in the brochures (Skandia Life manages to mention all three). These are couched as ‘principled’ investments: An investment that helps you profit from your principles. (Abbey Life)
2
Jupiter International Green Investment Trust (1989); Barchester Best
of Green (1991); Co-operative Insurance Society Environ (1990); Eagle Star Environmental Opportunities Trust (1989); TSB Environmental Investor Fund (1989); and Clerical Medical Evergreen (1990).
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Profit with responsibility. (Scottish Equitable) Somewhere in almost every brochure there is the assertion that you can have your ethical cake and eat it – that it is possible to invest ethically and still make a profit: … an ideal unit trust investment for those wishing to earn a healthy return by putting their money where their principles are. And You don’t have to compromise on the return you can expect from your investment just because you have principles. (Both from the Henderson Ethical Fund) From the Ethical Trust of Abbey Life: Now you don’t have to choose between profit and principles – because The Ethical Trust offers you a healthy return for your money in a way that will satisfy your own deeply-held beliefs and ideals. Friends Provident Stewardship: … you don’t have to sacrifice profit for principles. Miraculously all these funds seem to be performing extremely well. First, the Henderson Ethical Fund:
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The performance of the Fund has made other fund managers green – green with envy that is. And NPI: On an annualised basis, each of the Global Care funds has returned commendable performances. Clerical Medical Evergreen is up there too: … has earned a good reputation for the quality of its investment performance, consistently achieving above-average results over many years. The only allusion to poor performance comes from Skandia, but everything, apparently is all right now: In the past the green funds have been guilty of investing in companies because of their impeccable green credentials and not concentrating sufficiently on financial aspects. This is no longer the case. Green funds now have a performance to be proud of. So the punters are being told that not only can investments be ‘decent’ and ‘principled’ but you can make money as well. Friends Provident: The long term performance of this trust demonstrates that ethical investors really can profit from their principles. .... 35 ....
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If this were not enough to tempt the investor, there is more to come – ethical and green funds will do better than other funds in future. How can this be? The editors of the brochures are pretty certain they know the answers. The Henderson Ethical Fund states some ‘facts’ about ethically sound companies: … they are extremely well managed. They are progressive in outlook – and business practices. And ultimately they are much more interested in long term prosperity than hit and run profits. Next comes NPI’s nap: Over the long-term we believe that companies which address society’s needs and face up to today’s environmental challenges will prove to be winners. Not only can nice guys win, according to the Ethical Trust of Abbey Life, they are even a better tip than that: … you can share in the success of companies who have already recognised that the route to prosperity lies in preserving a decent quality of life – by caring for their workforce, contributing to the community and showing commitment to environmental and social issues.
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The Co-operative Bank’s ethical unit trust shares the view: … that socially aware companies are usually operated by concerned management and that this is often reflected in the success of their financial results. Finally (to cap it all), Friends Provident quotes from the renowned environmental activist, Sir Jonathan Potter to add yet more verisimilitude: A company that gets its environmental act together, believes in equal opportunities, puts money back into the community, and is open about its business, is likely to be a pretty well run company. And well run companies usually perform better than badly run companies. Q.E.D.
Authenticity The name of EIRIS (Ethical Investment, Research and Information Service) is frequently called upon to bear witness to authenticity – its ‘independence’ somehow guaranteeing dispassionate, high-quality information. EIRIS is even sometimes entrusted to come up with an agreed list of companies without the fund managers getting much involved in the
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process. Scottish Equitable also takes the trouble to mention its association with the UK Social Investment Forum. Other funds make play with the ‘great’ and the ‘good’ on their advisory panels (photographs of Brian Rix and Julian Pettifer are prominent in the Abbey Life leaflet). As you would expect, Friends Provident Stewardship makes space to tell us about its Committee of Reference, whose members meet regularly and ‘… wrestle long and hard over the criteria and the identification of appropriate companies in which to invest’. Skandia gets its research from the Jupiter Environment Research (not EIRIS) and has appointed ‘Lee Coates of the Ethical Investors Group, a recognised expert in the field of ethical investment to work closely with the research unit …’.
Making a difference The brochures proclaim that ethical investing can make a difference – and these usually take the form of unequivocal affirmations: … with Abbey Life’s Ethical Trust you can make a valuable investment which will ultimately benefit you, society – and the next generation. Investing in Scottish Equitable means that: … you will not only share in the enhanced prospects resulting from their (companies’) ethical .... 38 ....
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The brochures proclaim that ethical investing can make a difference – and these usually take the form of unequivocal affirmations ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■
policies, but you could be directly influencing the shape of tomorrow’s industry. If you were ever in doubt about where your responsibilities lie, Scottish Equitable can tell you. Its rallying call reads: From time immemorial each successive generation has assumed an implicit obligation for the custodianship of the Earth’s heritage. Never have the duties attaching to such been more poignant, exacting or formidable. In these short documents the editors have generally chosen not to speculate about exactly how these changes will come about; NPI and Clerical Medical Evergreen have a bash at it: Global care invests in industries which offer solutions to environmental and social problems … (NPI) .... 39 ....
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■
■
■
By investing in the Evergreen range of products you have the opportunity to make a real difference. Not only do we support these companies which are helping to reverse the many environmental problems currently facing the world, we also actively avoid organizations which are involved in anti-social activities. (Clerical Medical Evergreen) This is a new perspective: if neither individuals nor governments, can alone make for a better world, the embracement of an ‘enlightened’ commercial sector can.
The Friends Provident longitudinal study The Friends Provident (FP) brochures, leaflets and newsletters show a remarkable consistency in their content over time, and this should be stressed first. Both familiar Quaker-based exclusions (avoidance criteria: armaments, alcohol, tobacco and gambling) and positive aspects of investing are regularly listed. Secular aspects are more prominent in the later publications where one is more likely to read about environmental issues (pollution, waste disposal), equal opportunities and ‘strong community involvement’. Investment in FP Stewardship
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is a ‘decent’ investment (the 1997 brochure carrying a photograph of a nursing mother, but, mercifully, no apple pie). Again, it is stressed that ethical investing is bound to succeed (through some mysterious inner logic) in the ‘long-term’. The early publications draw on the ‘uniqueness’ of the fund, offering opportunities to invest, possibly for the first time, for those who feel uncomfortable with the stock market. By the later 1980s these dreams of uniqueness can no longer be legitimately made, the editors gaining capital from being the first EUT and the fund now supplying the widest range of socially responsible products. From 1989 onwards, FP Stewardship is also able to show that the fund is performing extremely well (and this supersedes the earlier rhetoric of ‘long-term’ rewards, with no apparent contradiction): Not surprisingly, such enlightened managements often out-perform their traditional ‘profit-only’ counterparts. (The Stewardship Anniversary Bond, 1989) And rather neatly: Investment returns that only harm the competition. (Stewardship Pension Fund, 1992) In 1994 the assertion is made that ethical funds are sure to succeed because they are ahead of the game: .... 41 ....
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There is an argument that what is ethical today may be required by law tomorrow. It makes sense that the companies whose managers are sensitive to developing trends could do better in the longer run. (FP Stewardship, 1994) Space is allocated in order to counter ‘misconceptions’. The first ‘misconception’ was one held for some time by the (then) Department of Trade – that restricting a portfolio on ethical grounds would threaten financial performance. Not so says Stewardship in 1987: Naturally, such stringent controls mean we often reject investing in some of Britain’s major companies. Surprisingly this has proven to be no disadvantage as results show that companies with enlightened managements often out-perform their traditional ‘profit-only’ counterparts. And in 1995 It is true that many larger companies, due to their diverse activities, do not meet the Stewardship investment criteria. However, around 40% of companies on the FT-SE Actuaries All-Share Index have been cleared, together with hundreds of companies in Europe and North America, so .... 42 ....
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Stewardship has a broad base from which to choose its investments. If you invest in Clerical and Medical Evergreen ‘you can be confident that your savings will benefit from the Evergreen philosophy’ (Clerical Medical Evergreen, 1996). Yet, it is very difficult indeed to find a ‘philosophy’ or statement of ethical principles. Clerical Medical Evergreen is not alone in this. It is as though the editors of these publications believe that investors do not want to read sentences with the word ‘because’ in them. Alternatively, this hand-waving to ‘philosophy’ could mean that some funds really have not thought ‘hard and long’ enough to product a coherent argument. And whatever the religious convictions of the originators, these documents are highly secular; somebody, somewhere believes that faith does not sell.
What the papers say The financial pages of ‘broadsheet’ newspapers are read avidly by moderately sophisticated individual investors with above-average disposable incomes (and those that aspire to this status). These pages constitute a major advertising vehicle for the finance industry as alongside advertisements there are influential commentaries from financial journalists. What do journalists make of ethical investing? .... 43 ....
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There are plenty of articles about ethical and green investing and there are no signs of abatement. There are many new products coming on to the market, which explains some of the coverage. More than that, these kinds of investment make a good ‘story’ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■
An analysis of relevant articles over an 18-month period provides an insight (Winnett and Lewis, 2000). First of all, there are plenty of articles about ethical and green investing and there are no signs of abatement. There are many new products coming on to the market, which explains some of the coverage. More than that, these kinds of investment make a good ‘story’. They have novelty value and are seen as ‘alternative’, even ‘exotic’. Ethical investing can be linked to mainstream news stories. As an example in 1995, the Brent Spar oil-rig fiasco and Shell’s involvement in Nigeria were juxtaposed with green investment opportunities in the personal finance pages. Reportage can be joined to ethical issues in business, e.g. large pay awards to directors (especially if this can be associated with some aspect of poor performance in the same company). .... 44 ....
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Many articles follow a standard pattern. They begin by saying what ethical investing is, commenting on the exclusions and the proactive characteristics, finally concentrating on comparative performance. Quotes are usually included from fund managers and other representatives. The articles that do more than this are among the most instructive. In these instances the author writes about models of finance or ethics or both which contribute to some kind of accepted popular wisdom, which may be a long way from economic models which are based on standard neo-classical assumptions of rational decision making and efficient markets. The analysis is divided into three sections: the product, performance and the market.
The product As was found when looking at the FP brochures, leaflets and newsletters over time, there has been a broadening of the agenda. Environmentally acceptable investment is now more common, as is a variant of socially responsible investment specifying equal opportunities and the fair treatment of employees; the latter frequently being located in a wider debate about business ethics. A second feature of the evolving product is niche marketing which appeals to investors who are dissatisfied .... 45 ....
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with the ‘standard’ ethical package. Included are funds for members of the Islamic religion and ‘Genesis Life’ which highlights the ‘sanctity of human life’ among its ethical criteria. A proportion of the reporting (which is common to British newspaper reporting generally) seeks to uncover the ‘truth’ behind the ‘holier than thou’ facade. Authenticity is not infrequently called into question because of the fuzziness of the criteria. Quite what is and what is not ethical is problematic as conflicting ethical criteria are becoming applied as a result of product diversification. The Sunday Telegraph had somewhat of a scoop when it was able to quote the director of Greenpeace saying that ethical investors were being duped: We believe that there will be a backlash against ethical investment as more disgruntled customers find they have been taken for a ride. (Sunday Telegraph, 9 July 1995)
Performance revisited Implicit in financial journalism is the belief that commentators can somehow spot winners and beat the market. The problem is much of the commentary is based on short runs of statistics, across funds which are volatile, and deviate
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considerably from one another, which together means that there is plenty of scope to mould reported performance to produce the desired story. Hence, the Sunday Times of 14 January 1996 can say: ‘Ethical and green funds are achieving results that shame many conventional rivals, dispelling their image as lightweight vehicles for the politically correct’. Yet, within a few weeks the Sunday Telegraph can run a contradictory story (3 March 1996): ‘Unfortunately, the record of ethical and environmental unit trusts offers little comfort. With a couple of important exceptions, they have performed disappointingly’. Journalists appear to take three positions: 1 that investors must accept some loss of financial return if they want to apply their principles (something which the vast majority of EUTs themselves deny); 2 the refutation of a conflict between profits and principles (which is the message the EUTs prefer); 3 that financial journalists have privileged information which means that ethical investors will benefit in the long run. The portrayal of loss making as inevitable is based on the belief that a restricted pool of companies (that pass ethical criteria) will lead to reduced profits. This understanding is a regular component of ‘popular’ models. More .... 47 ....
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statistically sophisticated models (including economic models) stress that risk declines quickly with diversification. The term ‘popular’ should not be seen as a patronizing label as many sophisticated people (including it will be recalled, brains at the Department of Trade) also share the view that ethical portfolios will perform poorly because they are too restricted, or at least they have done in the past. Research in economic psychology, behavioural finance (and for that matter psychology generally) has consistently shown that people do not embrace the notion of ‘randomness’ with any kind of enthusiasm. Instead people invest a good deal of time trying to make the world they inhabit (including the behaviour of other people) predictable. Journalists have this tendency too and, given that their raison d’être is to fill the page, this ultimately leads to making bold and inconsistent claims on flimsy evidence. The ‘popular’ models stress predictability, while the economic models stress essential randomness and cautious inference (cf. Thaler, 1993; Malkiel, 1985). The second assertion, that there is no conflict between ethics and return, is substantiated again with performance data, but these are endlessly manipulable. The third set of beliefs is the most interesting. It is variously claimed that ethical investments will be successful
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because of the extensive screening process; that these companies must be long-term winners because of their adherence to good causes: there is a supposed complementarity between good companies and good long-term performance. The general tone of many of the commentaries is that ‘long-term’ gains come from ‘responsible’ behaviour, and that short-term gains are for the less scrupulous and myopic.
The market The narratives suggest that ethical investing is a rewarding activity, where investors can help to make for a better world in the future: that individual investment decisions can alter corporate behaviour. Quotations and the views of fund managers are printed in newspapers often without comment enhancing these claims: NPI Global Care Fund, for instance, enters into correspondence with the companies in which it has chosen to invest or disinvest. In this way it is performing an educational role: the companies will know that unacceptable behaviour means no money. (Sunday Independent, 1 October 1995) And .... 49 ....
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Quotations and the views of fund managers are printed in newspapers often without comment enhancing these claims ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■
Simon Baker, manager of the Jupiter Ecology Fund, suggests that green funds could hold out a carrot to the industry by identifying, and being prepared to invest in, the oil groups with the highest environmental standards. (Sunday Telegraph, 3 March 1996) This relationship between individual conscious-salving and social efficacy is one which fund managers (using the conduit of journalism and with one suspects some sympathy from the journalists who share the same popular model) want us to believe. Whether one likes it or not, professional economists are anxious to disabuse us of this belief. The economic model of the market is impersonal, individual actions are inconsequential – there are no gains to be made from attempting to predict market behaviour. The ‘popular’ model unequivocally attests that individual actions matter and gains can be made with the appropriate insights. To quote Winnett and Lewis (2000: 329): .... 50 ....
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The old established financial commentators’ rhetoric of predictability, long denied by economists, has been given a new dimension by being able to draw on a wider moralising discourse about the market.
Telling stories The varying stories told reflect the motivations of the players. Economists want a parsimonious model of the market, employing only economic variables, which can be readily translated into mathematical notation. The job of marketing departments is, of course, to sell. In order to do this job well, one needs a little psychology. The merits of ethical investing need to be flagged up: they are principled, authentic; they perform well (e.g. ethical investing is bound to do well as it is bound up with the future); they have redeeming effects both on markets and society as a whole. At the same time, it can be sensible to address the doubts and worries of potential investors by, for instance, reassuring readers that ethical funds have to be very carefully and professionally managed in order to render acceptable returns for a moral (and, therefore, restricted) portfolio. Financial journalists are paid to write, inform, and to some extent, entertain. The ‘dismal science’ of economics .... 51 ....
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is not the easiest of topics to draw the crowds. Ethical investing helps because it is, at turns, exotic, quirky and ripe for investigation should ethical claims seem shaky. Financial journalists enthusiastically pick up the theme that moral considerations can influence markets and provide market insights about market predictability. Finally, economic psychologists and economic sociologists see markets as full of people not abstract equations. People bring with them values, social norms and beliefs about what constitutes acceptable and unacceptable behaviour. These things shape how markets operate and indeed what they are. All four of these accounts affect how markets are viewed. There can be little doubt that economists have been very successful in the persuasion game and they would be called upon if an ‘expert’ opinion were needed, yet most investors trust their own beliefs and judgements. The marketing literature is largely what investors want to hear and, along with the claims of financial journalists, it is these stories, not the abstractions of economic theory, which are telling, not least because of their appeal to what everyone knows – common sense.
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CHAPTER
4
Ethical investors: nature, perceptions and preferences
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he main part of this chapter is based on information
T
collected from questionnaires completed by 1,146 UK ethical investors, the largest survey of its kind in
the UK to date (Lewis and Mackenzie, 2000b). Much previous relevant survey work has been undertaken commercially and has largely comprised marketing questions rather than those which are more theoretically driven. The questionnaire (reproduced in the Appendix) was constructed in order to address the following questions:
■
Who are the ethical investors?
■
Do they hold ‘ethical’ investments and ‘not so ethical’ ones at the same time?
■
Do they perceive that ethical investments produce poorer returns than alternatives? Are these investments riskier than others?
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■
Would people stick with their investments should returns fall?
About the survey The survey was conducted with the help of two of the largest UK ethical unit trusts. Investors received a letter with their regular mailings from the EUT, encouraging their participation, along with the questionnaire and a freepost envelope addressed to the researchers at the University of Bath. Prospective participants learned that each questionnaire completed would result in 50 pence being donated to the charity Cancer and Leukaemia in Childhood (CLIC); £573 was raised in this way. The questionnaire was distributed randomly. A response rate of 32% is in line with response rates the trusts themselves have achieved. One can be cautiously optimistic about the survey’s representativeness given the wide geographical distribution of respondents, the large sample size and the fact that the majority of people who invest ethically in the UK will have investments in one or other (or indeed, both) of these EUTs. The researchers also had the opportunity to compare the demographic characteristics of respondents with commercial information – there was a close match.
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What are ethical investors like? In the 1980s and beyond, investments taking moral considerations into account were viewed cynically by the City of London. Visions were conjured of hairy ‘lefties’ in sandals, kaftans, and bodies drenched in patchouli oil. It was merely a ‘fad’ or ‘fashion’ of no consequence. Is this indeed what ethical investors are like? In some senses the results of the survey reveal a profile of ethical investors which is similar to ‘ordinary’ investors – older, often professional people with money to invest. A closer inspection manifests stark contrasts, especially when enquiring about membership of political parties: more are members of the Green Party (2.4%) than the Conservative Party (1.7%); 7.7% were members of the Liberal Democrats and 16% the Labour Party. People employed (or previously employed) in the ‘caring professions’ were over-represented: 31% worked in the education sector, 14% in health; barely 5% and 4% respectively were from the retailing and manufacturing industries. Ethical investors are frequently active contributors to charities and pressure groups as well as holding significant religious allegiances: over 10% are involved with the Society of Friends; 16% with the Church of England. The most popular charities include the National Trust (37%), Amnesty International (31%),
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People employed (or previously employed) in the ‘caring professions’ were over-represented: 31% worked in education, 14% in health; barely 5% and 4% respectively were from retailing and manufacturing ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■
Oxfam (29%), Friends of the Earth (28%) and Greenpeace (26%). Women take a much more active part than in previous generations in the major economic decisions of the household, not just domestic household management. Nevertheless, it is a surprise that fully 46% of our respondents were female, which suggests that these kinds of investments appeal particularly to women. Many of these results are substantiated by Woodward (2000), although she has a smaller sample. Woodward’s profile of the ethical investor is a well educated, middleaged individual with a managerial/professional occupation. More than 50% of her sample said they were actively associated with two or more ‘cause-related’ groups (e.g. Greenpeace). We both conclude that ethical investing forms part of a coherent lifestyle. .... 58 ....
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Respondents are particularly concerned about nuclear power, pollution, the Third World, the armaments trade and animal testing. There was slightly less concern about pornography (although there are significant sex differences – women being much more concerned), gambling and the manufacture and distribution of alcohol. Our respondents are strongly motivated to help companies which are making a positive contribution to society and symmetrically motivated to avoid investing in companies which are doing harm. They want their investments to be ‘ethically’ clean. It seems plausible that the radicals of the 1960s and 1970s have become tempered with age; they now have enough money to express their beliefs within the marketplace. As Lewis and Cullis (1990: 403/4) have put it: … the decade of the 1960s saw a vitalization of what we might term post-industrial values; an increased environmental consciousness … The socialization and learning process are critical periods where persistent attitudes and values are laid down in bedrock. The most obvious of these periods is adolescence. Some adolescents of the 1960’s (and 70’s) are now the affluent middle aged (and older) investors making their preferences felt … .... 59 ....
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Respondents are particularly concerned about nuclear power, pollution, the Third World, the armaments trade and animal testing. There was slightly less concern about pornography (although there are significant sex differences – women being much more concerned), gambling and the manufacture and distribution of alcohol ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■
The stereotype ‘leftie’ image will not do; we are talking about largely responsible and professional people doing what they believe is right.
Saints and sinners When the research began (and in my naïvety), I thought there would be some neat divide between saints and sinners: this is not the case. Our survey reveals that only 20% claim to have no non-ethical investments at all, leaving 80% with ‘morally-mixed’ portfolios. Quite why investors persist with what at first sight appear to be inconsistencies is pursued in Chapter 5. On this basis one might want to make a distinction between ‘committed’ and ‘pragmatic’ ethical investors. (Cullis, Lewis and Winnett (1992) talk of ‘quasi’ and ‘real’ ethical investors but this may be too strong.) But whether .... 60 ....
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one puts all one’s investment eggs in one basket is not the full story as one would want to learn about the proportion of one’s investments which are sub-divided; after all, a ‘morally-mixed’ portfolio may comprise 1% invested ethically or 99%. Our results show a positively skewed distribution with a long tail to the right. The mean (average) amount invested ethically is 31% (of those with ‘morallymixed’ portfolios). The mid-point (median) which separates the distribution into two equal halves is lower (21%). The most popular single amount (mode) is 10%.
Risk and return There are many claims and counter-claims about risk and return to be found both in the financial pages of broadsheet newspapers (including the Financial Times itself) and the reports from the ethical unit trusts. The ‘doubters’ argue, among other things, that restricting a portfolio on nonfinancial grounds is bound to impinge on performance and perhaps also increase risk. The ‘supporters’ point to the forward-looking long-term performance of these kinds of investments, implying that funds which take moral and environmental issues into account have some kind of special access to market predictability (see Chapter 3, where these notions are elaborated upon). Certainly Friends Provident Stewardship Pension Fund, the oldest UK ethical .... 61 ....
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fund, claims to have out-performed the UK equity general sector between 1984 and 2000. All the other funds have shorter runs of performance statistics so it is difficult to arrive at any ‘objective’ view. One can say, however, that it is currently not necessary to take a loss investing ethically (although some people choose to do so by accepting lower than market rates by using banking institutions such as Shared Interest, Mercury Provident or the Ecological Building Society). An important aspect of the questionnaire survey was to discover what investors themselves thought about risk and return based on their perceptions and subjective evaluations. More than 42% believe their ethical investments produce a lower rate of return than ordinary investments and almost 19% perceive them as riskier. From this evidence we can already see that substantial numbers perceive that they are incurring costs by putting their money where their morals are. As a foil to this, it must be recorded that 41% believed that ethicals give a similar rate of return and nearly 14% a higher rate of return; 21% see them as less risky. So the picture is not clear cut, and the way these trusts are written about by financial journalists make all these perceptions plausible. Yet, the steady performance of the ‘mainstream’ ethical investments means that even if you have no ethical leanings yourself, you might consider them as part of your investment portfolio. The crucial .... 62 ....
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question is whether people are prepared to take a loss. Clearly 42% already think they do, but what of the others? Three hypothetical questions were posed all of which took the following form: ‘Imagine that over the next five years the best ethical fund produced an X% average financial return whereas a typical ordinary unit trust produced a Y% average annual return. Assume everything else remains the same. Which of the following would you do?’ Respondents are then offered five choices covering reducing or increasing ethical investments a little, or substantially, or keeping things as they are. The values for X and Y are in turn: 1 Ethical 8%, Ordinary 10%; 2 Ethical 5%, Ordinary 10%; 3 Ethical 12%, Ordinary 10%. These questions assess what economists term the elasticity of demand. Elastic demand would suggest that portfolios would alter with changes in return; relatively inelastic demand would be represented with little or no changes to portfolios. The results reveal that over 80% of our respondents would stay loyal to their ethical investment in the first example, and over 56% in the second. The behaviour of our respondents is, therefore, relatively inelastic for losses. The survey showed that 61% would increase their ethical .... 63 ....
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■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■
The behaviour of our respondents is relatively inelastic for losses ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■
investments where they out-performed others and one must wonder why this figure is not 100%. When reporting this result at a conference, one economist in the audience asserted that either my figures were wrong or my respondents were idiots – I naturally refute both these assertions, yet a story clearly needs to be told. First of all, most investors are aware that changing a portfolio incurs costs, added to this is a certain degree of inertia. We have also discovered in our qualitative work, that investors are suspicious of ethical funds that do too well; it raises doubts about authenticity. Taken together these results are persuasive, yet there are critical questions that must be posed. What, for example, might non-ethical investors do when faced with these hypothetical changes in return across their portfolio? We have no direct comparison to make but the work of Lewis and Webley (1994) is informative. In that pilot study, 100 investors who were unfamiliar with ethical funds, were asked to consider them. Participants were asked what
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proportion, if any, they would invest ethically if they received a windfall of £1,000, provided that these funds produced similar returns to their existing investments. The results showed that 56 people (56%) were happy to (hypothetically) invest most or all of the windfall in this manner. More relevant to our current concerns is the reaction of participants to falling return. As one might expect, people move out of ‘ethicals’ much more quickly than real ethical investors say they would: only 22 people would stay with ‘ethicals’ with a comparative return of 8:10% compared to ‘ordinaries’; just four people remained for the 5:10% option. A final caveat relates to the way the questions were ‘framed’ in the original large questionnaire survey. It could well be the case that participants might be less keen to maintain their investments if they were informed that the ethical part of their portfolios were under-performing by 20% or 50% compared to ordinary investments (which is equivalent to the comparative ratios quoted: 8:10; 5:10). One would expect also that ‘windfalls’ would be treated very differently to pension funds; people taking risks with the former and being particularly cautious with the latter. All of these questions, as they say in the trade, are empirical questions of theoretical and commercial importance, and as yet unanswered.
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Elaborations Some further analyses were undertaken to answer the following three questions: 1 Are beliefs about the financial performance and risk of ethical funds related to the proportion invested ethically? 2 Are beliefs about financial performance and risk related to the willingness to sacrifice financial return? 3 Is the proportion invested ethically related to the willingness to sacrifice financial return? A series of chi-squared analyses was performed with risk and return reduced to three categories (i.e. Risk: 1 = a little riskier + much riskier; 2 = about the same; 3 = a little + a lot less risky. Return: 1 = a slightly + a much lower rate of return; 2 = about the same; 3 = a slightly higher + a much higher rate of return). The percentage holding in ‘ethicals’ was also reduced to three categories (i.e. 1 = 1–19%; 2 = 20–39%; 3 = 40% or more). Responses to comparative performance were again recoded into three: 1 = Reduce ethical investment substantially + a little; 2 = Leave things as they are; 3 = Increase a little + substantially. Dealing with the questions in turn, the first suggests that one would invest less of one’s portfolio if it were perceived
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that ethicals were riskier or provided lower returns: this was not observed. In the second, it seems reasonable to assume that if you perceived that ‘ethicals’ were performing as well as any other, the idea of these same funds underperforming would be new territory, whereas for those who already believed they were taking a loss, it would not be. With one exception, there were no significant associations (the exception being if one initially perceived that ethicals were under-performing, the scenario where ethical outperformed others was greeted with more enthusiasm). What is to be made of these results? It seems that the proportion invested is not a function of financial criteria alone, neither is the decision to stay with ethicals under fluctuating circumstances. In relation to question 3, there are several possibilities, one of which is that the more one invests, the greater the cost of under-performance and the more one is likely to change one’s portfolio under these circumstances; again, there is no evidence for this in our data – possible interpretations are picked up in the section that follows.
Attitudes In economics, moral commitments and opinions are all lumped together as ‘preferences’. Furthermore, these preferences are generally treated as exogenous in economic .... 67 ....
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models, and are only referred to if all else fails. The whole notion of ethical investing (as well as the research agenda of economic psychology) cries out for preferences to be at the heart of any explanatory model. The raison d’être for our participants is putting their moral commitments into practice. From the perspective of social psychology, the pot-pourri of ‘preferences’ needs unpacking. ‘Opinions’ may change rapidly; ‘attitudes’ are considered more enduring. At least since the 1960s, a vast literature has grown attempting to link, in particular, attitudes to behaviour, without a great deal of success. (Exceptions can be found in the work of Ajzen and Fishbein (1980) using peculiar measures of attitudes and ‘behavioural intentions’.) It seems likely that ‘moral commitments’ are more deep-seated, necessitating individuals to reflect carefully on inconsistencies between these commitments and what they do. Webley and Lewis (1994) in a further pilot study were able to show that environmental attitudes can be shown to influence sympathy toward ‘green’ investing. Eightyfour undergraduate students were asked to assign a sum of £40,000 across five sets of shares, one of which was a ‘green’ (ethical) unit trust. Participants were randomly assigned to one of three groups. In the first the green fund did well compared to the others; in the second the
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performance was average and in the third it was poor. The performance of the other unit trusts was the same for everyone: the Far East and European trusts performed roughly in line with the FT all-share index; UK blue chip showed a slow but steady increase; the ‘global’ trust was the ‘star’ performer. All the information was presented, and the choices recorded on computers. The computer simulations covered a period of one-and-a-half years, participants making investments choices every quarter in the light of financial and other changes presented on near perfect imitations of teletext displays used by Independent Television’s Oracle service in the UK. After the simulations, participants completed a 20item ‘green’ attitude scale. The results showed that people with ‘green’ attitudes showed a greater enthusiasm for green ethical investments. By the last quarter of the computer simulation, 26% of investments from among those with more favourable green attitudes were placed in the green ethical fund when its performance was average or better. ‘Moral-commitment’ is difficult if not impossible to assess using a questionnaire. We do, however, have information, at the very least, about the attitudes and preferences of our sample of 1,146 as presented in Table 4.1. There is a large amount of information here and it is customary to engage in a data reduction exercise, called factor
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■
ITEM (Ethical Motives) I want to avoid investing in companies that are doing harm I want my investments to help those companies which are making a positive contribution to society I want my money to be used to campaign for companies to change I want my investments to be ethically clean
Q6 6a 6b
6c
.... 70 .... 6d
4.62
–0.785
–0.626
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3.88
–0.727
0.738
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4.71
4.82
Mean
Factor loading (EM)
Factor analysis and descriptive statistics of motive and attitude items
Five-point scale ‘1’ Strongly disagree – ‘5’ Agree strongly
TABLE 4.1
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Nuclear power is a good alternative to the use of limited fossil fuels The degradation of the ozone layer is a very serious problem We should do more to help the Third World The production and sale of armaments should, in the interests of world peace, be much more vigorously controlled
14.3 14.7 14.8 14.9
▲
.... 71 .... 4.39
–0.533
–0.631
–0.661
–0.536
–0.53
Factor loading (PSA)
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4.8
4.56
4.62
2.18
Mean
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14.10 We should stop using animals to test cosmetic products
ITEM (Primary Social Attitudes)
Q14
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.... 72 .... 3.68
–0.55
–0.512
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14.11 Manufacturers and retailers of alcoholic drinks take advantage of other people’s weaknesses
2.05
–0.645
–0.516
Factor loading (SSA)
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There is no need to worry about the extent of gambling in Britain today
3.9
There should be more restrictions on 14.2 the production and sale of pornographic magazines 14.6
4.23
Smoking in public places should be forbidden
14.1
Mean
ITEM (Secondary Social Attitudes)
Q14
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analysis, to make the information more manageable. Three factors emerged, namely ‘Ethical Motives’, ‘Primary Social Attitudes’ and ‘Secondary Social Attitudes’. All three factors influenced willingness to sacrifice rates of return on investments (see Table 4.2). While all combinations between losses, motives and attitudes were statistically significant, the most robust relationships were with ‘Ethical Motives’ and ‘Primary Social Attitudes’ The more one identifies with the aims of ethical investing (‘Ethical Motives’) and is concerned about nuclear power, the ozone layer, the Third World, armaments and animal testing (‘Primary Social Attitudes’), the more likely it is that one will stick to ethical investments even when they perform badly. When ‘ethicals’ out-performed ‘ordinary’ investments, ‘Ethical Motives’ and ‘Social Attitudes’ had no discriminatory value; people are equally happy to be doing the right thing when returns are good. There is some satisfaction to be found in relating motives and relevant attitudes to the willingness to sacrifice financial return, yet the proportion invested ethically may be more informative. People who invest a smaller proportion of their investments ethically are more likely, statistically, to enthusiastically grab opportunities when ‘ethicals’ out-perform the ‘ordinaries’ (x2 = 77.7, df = 2, p < 0.0001).1
1
df = 2 as there were no respondents who said that they would
reduce their investments in this condition.
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Secondary social
attitudes (means)
18.1
18.5
17.6
18.3
18.3
19.4
22.2
22.7
21.7
22.5
23.1
23.0
15.7
16.3
F = 3.24, p < 0.05, df2, 1098)
15.2
15.9
16.4
(F = 3.27, p < 0.05, df2, 1069)
15.5
(n.s.)
18.2
F = 17.68, p < 0.001, df2, 1098) (F = 10.96, p < 0.001, df2, 1069) (n.s.)
20.1
(F = 15.23, p < 0.001, df2, 1034) (F = 11.86, p < 0.001, df2, 1027) (n.s.)
16.7
15.7
22.1
17.96
Reduce Same
15.8
22.3
18.06
Increase
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Primary social
(means)
Increase
Ethical 12% Ordinary 10%
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Ethical motives
Reduce Same
Increase
Reduce
Same
Ethical 5% Ordinary 10%
Ethical returns 8% Ordinary 10%
TABLE 4.2 ■ One-way ANOVA comparing the motives and social attitudes of investors with ethical investment choices with varying rates of return
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Nevertheless, the most important overall result is that the willingness to accept financial losses is not evident only among those with little invested ethically; there is even a tendency among those who invest 40% or more to be more inelastic for losses than other ethical investors in the 5%:10% condition (see Table 4.3). While we have no information about the actual amounts involved, these results are extraordinary and suggest that the proportion invested ethically is a measure of moral commitment – a proxy. The logic would run something like this: those with smaller proportions invested ethically have more ‘slack’ when ‘ethicals’ perform particularly well, others already possessing higher proportions; but for losses it would appear that those with a smaller proportion invested would have less to lose and the rest more, yet it is those with more to lose who ‘keep the faith’.
An experimental approach The final section of this chapter is based on an experimental investigation of commitment among ethical investors using contemporary information technology. A computer simulation reported earlier in this chapter (Webley and Lewis, 1994) was imaginative but had its limitations: the participants were not investors and the simulation required directly changing one’s portfolio when it is much more .... 75 ....
■
.... 76 .... 100 (120) 388
Count
609
207 (188)
(189)
(120)
40
14 (12)
(12)
(16)
10 15
More or substantially more
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40%<
169
137
20–39%
233 (231)
151 (147)
About the same
1–19%
Less or substantially less
‘Ethical’ 5% return: Ordinary 10%
Ethical investing with falling returns compared to proportion invested ethically
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Key: The values in brackets refer to figures one would expect if there was no relationship between the two variables. x2 = 12.7 df = 4 p < 0.013
Proportion invested ethically
TABLE 4.3
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common for this to be done through a third party (independent financial adviser, IFA) based on the advice of that same third party. The computer simulation reported below, largely devised by my colleague on the Morals and Markets project, Paul Webley (Webley, Lewis and Mackenzie, 2001), is an improvement on these beginnings. The participants were all ‘real’ investors (28 ‘ethical’ and 28 ‘ordinary’) and the hypothetical changes were based on their own actual portfolios with assets of £2,000 to over £600,000. Furthermore, advice was presented on the screen at quarterly intervals by a ‘virtual’ IFA. After a practice run, participants were presented with eight different scenarios, each speculating about the next five years. After every scenario the question was posed: ‘If this scenario comes true, how would you alter your portfolio today?’ The first four cases presented good and bad performance both for ‘ethicals’ and ‘ordinary’ unit trusts. The ethical investors then completed four more depicting lack of ethical impact, an ethical fund scandal, the launch of a new ‘active engagement’ fund and an example of very poor ethical performance (details of the other scenarios, procedures and the full results can be found in the published paper). The results are largely in line to what was found in the questionnaire study and add weight to them. When ethical funds do well, ethical investors respond more strongly; crucially ethical investors are not put off even when their
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favoured funds perform badly. In the ‘lack of ethical impact’ condition an ethics professor supposedly produced a damning report, but, again, investment choices are hardly affected. As one participant put it: ‘… there are two reasons to invest ethically – to influence companies and to maintain integrity. Just because ethical investment was found to be ineffective would be no reason to withdraw one’s fund’.
Recapitulation Returning to our original four questions, we now have the answers to each. What makes ethical investors different is not their age or income but their value systems and how these choose to live their lives. Compared to ‘ordinary’ investors, more of them are in the ‘caring’ professions – particularly health and education. Ethical investors are more frequently religious, active in pressure groups and supportive of ‘liberal’ (and green) political stances. They are far from being saints though and 80% have ‘morallymixed’ portfolios. Some 42% believe they are already making financial sacrifices aligning their investment decisions with their moral commitment. Furthermore (and irrespective of their perceptions of the performance of ‘ethicals’), over 80% of those with ‘mixed portfolios’ would not change them if ‘ethicals’ were performing 20% below their
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‘ordinary’ investments. This ‘price inelasticity’ for losses has also been demonstrated in a simulated interaction experiment with a ‘virtual’ IFA. This result reveals that, although there is a certain pragmatism in holding a morally mixed portfolio in the first place, investors are loyal to the ethical investments they have. Ethical investors are clearly not all the same, those who endorse ethical motives enthusiastically and those most concerned about nuclear power, ozone-layer degradation, the Third World, armament production and animal testing are more prepared to take financial losses. This willingness to accept losses is not, however, a function of the proportion invested ethically – investors with the most to lose stick with ‘ethicals’ just as much as people whose investments are ‘spare cash’. There could be two systems at work here: those with smaller proportions invested ethically can in some senses, ‘afford’ to lose some money as the effect on their overall financial position will be marginal; for those with a larger proportion invested ethically, the financial losses would certainly hurt, but they persist, perhaps because the proportion invested ethically is an indication of the strength of their moral commitment.
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CHAPTER
5
Mixed motives
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ntil now we have concentrated on people who
U
own ethical unit trusts (the equivalent of mutual funds in the USA). As was seen in the previous
chapter, it is common for these investors to express their moral beliefs in other ways by joining pressure groups, giving to charity or becoming involved in voluntary work. The survey work suggested that one might use the labels ‘committed’ or ‘pragmatic’ to describe the various hues people take on, but to investigate motives more fully qualitative methods (interviews, focus groups) can be very informative. The first study reports on 10 telephone interviews with investors in Shared Interest (hereafter SI). SI was founded by Traidcraft, a Christian-based alternative trade organization, and the Ecumenical Development Co-operative Society.
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■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■
Shared Interest operates rather like a bank, financing mainly small businesses in Third World countries. The loans are relatively inexpensive and consequently the returns that ethical investors receive are low, even less than a building society ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■
Shared Interest operates rather like a bank, financing mainly small businesses in Third World countries. The loans are relatively inexpensive and consequently the returns that ethical investors in SI receive are low, less even than a building society. These are precisely the people that one would want to target, as they are clearly taking a loss investing in this way and are likely to be at the ‘committed’ end of the spectrum. The 10 interviewees were randomly selected from a list of volunteers who had responded to an SI mailing request. The main questions put to investors in semi-structured interviews probed whether respondents could articulate the principles behind their decision and why, for example, they did not give the money directly to Third World charities instead. They were also asked how they would respond to an increase in their returns which would bring them in line with a mainstream building society (a feasible .... 84 ....
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option). The interviews generally lasted around 45 minutes each and were conducted by Craig Mackenzie (Mackenzie and Lewis, 1999). All the interviews were transcribed and read, at first, independently by Craig and myself – we then compared notes.
Ten Shared Interest Respondents came up with plenty of explanations for their actions, some were allied to Christian teaching and others were clearly of secular origin. All of the interviewees described themselves as Christians. Some saw it as their moral duty to invest ethically (deontological motives); others that it was clearly improving the welfare of the Third World (consequentialist motives); that investing in SI was a good thing in itself (eudaemonic). Respondents, however, did not take the moral high ground and several recognized that in part the actions they took were simply to salve their consciences; to feel less bad about making money by investing. Of the more secular motives, notions of fairness, the need to reduce inequality and economic injustice were common. There was also an underlying belief that markets, can, under the right circumstances, be liberating, and by helping people to help themselves, previously impoverished people can gain a sense of selfrespect. .... 85 ....
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The rhetoric of ‘helping people to help themselves’ partly explains the reluctance to give SI investments to charity; there is a feeling that charitable contributions can breed dependence (although SI investors give to charity in other contexts). When making investments (as opposed to making charitable contributions), there is a sense of maintaining control; one can withdraw money if promises are not kept. Also, there is some good old-fashioned self-interest involved as people are reluctant to see their capital dwindle. The kinds of moral complexities that respondents have identified do not fit neatly into a model of economic selfinterest, nor do they fit comfortably with ‘altruistic man’. We have described our SI folk as ‘committed’ ethical investors and indeed, on average, some 5% of individual portfolios are in SI, but what of the rest? As with the respondents to the survey, it is common for SI investors to have an ethically ‘mixed bag’ as well. Yet, this 5% is a statement worth making and SI investors are not enamoured with the prospect of returns in line with a building society; a higher return somehow diminishes the intent.
Ten EIRIS The 10 Shared Interest interviews were followed up by 10 interviews with people on the books of the Ethical Invest.... 86 ....
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ment Research and Information Service (EIRIS). EIRIS regularly mails information to subscribers about the ethical criteria of a range of investment opportunities and this vehicle was used to recruit interviewees; 10 were selected at random from among the volunteers. EIRIS members are more likely to be ‘pragmatic’ secular investors and questions were selected to specifically address whether respondents felt there were any moral dilemmas involved in investing both ethically and not so ethically at the same time. Other questions again related to moral motivations and how the potentially conflicting aspects of moral and financial commitments and responsibilities were dealt with. As with the SI interviews, all were transcribed and read by Craig Mackenzie and myself. In addition, a qualitative data analysis software package, Hyper Research, was employed to organize the data systematically. Some 250 pages of text were initially produced and reduced to 90 pages following analysis. While all the SI respondents described themselves as Christians, there were just two in the EIRIS sample, who were both Quakers. Unlike the SI investors, alleviating poverty in the Third World was not necessarily the main motive for EIRIS members who mentioned armaments, environmental issues, animal welfare and unethical corporate practices. EIRIS respondents tend to invest about 20% of their portfolios in ‘mainstream ethicals’ (it will be
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recalled that SI respondents invested about 5% specifically in Shared Interest). It appears that SI investments can be like ‘spare cash’: people do not want to see a reduction in their capital but if it comes to the crunch, it would not be the end of the world. As one EIRIS investor, who also had money in SI, put it: I wanted to support those organizations in what they were doing. I didn’t make those [SI] investments to get a monetary return at all. I’d like to think the money will stay flat and not disappear but there’s always the possibility that it will go and it wouldn’t worry me too greatly. (Mackenzie and Lewis, 1999: 446) Investing in SI appears to be some kind of middle way between charitable giving and ‘mainstream ethical’ investing, for ‘mainstream ethical’ investors may be prepared to take a loss but not necessarily a long-term and predictable one. It is not unusual to have unethical funds as well where financial performance is more important than morality.
Mixed motives Every one of our EIRIS respondents, on their own admission, said they had unethical investments including Shell, .... 88 ....
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British American Tobacco and the Foreign & Colonial Investment Trust (which has holdings in companies that manufacture armaments). In explaining ‘ethical contradictions’, respondents drew on what Thaler (1994) has termed ‘mental accounting’: where money comes from and what it is for is of great importance. For example, money which is inherited tends to be treated differently from money one has acquired directly through one’s own endeavours: people seem to feel more ethically responsible for the latter than the former. Allegiances can go beyond the grave; investments, perhaps passed on by parents, are left much as they were, whereas new investments may be invested ethically. There is also evidence of a sense of inertia. The unethical investments are some kind of historical accident. It is only a matter of time before one will get around to putting one’s portfolio in ethical order. There is talk of being ‘realistic’ about the need to make enough money for retirement; a mixed portfolio is required to do this. There is a suggestion too that the motive to bequeath is much more powerful than some economists give credit. Our respondents told us there was a moral responsibility to provide as much as possible for offspring and that responsibility sometimes dominated other forms of social responsibility. Putting the evidence of the SI and EIRIS interviews together, it has been shown that moral and financial com-
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promises are commonplace where individuals are neither maximizing their financial return nor their ethics.
Focus groups We now have qualitative information from 20 ethical investors, and quantitative information from 1,146. Focus groups offer a different insight. When filling out a questionnaire, it is usually done alone. In a telephone interview, it is still essentially a one-way and limited interaction: the interviewer asks the questions and the interviewee answers them. In a focus group, opinions and beliefs are expressed in a social context, and they may be challenged or changed as a consequence of the presence or reactions of others. This was what was tried next (Lewis, 2001). Fourteen focus groups were conducted altogether: seven involved ‘ethical/green’ investors and seven ‘ordinary’ investors. The average size of each group was seven. The respondents were recruited with the help of local IFAs and the interviews were conducted in Bath and Exeter. Respondents were initially contacted and it was explained that they would be contributing to a research project on investing that particularly valued the views of non-experts. On arrival, participants were given tea or coffee and introduced to the facilitator (Craig Mackenzie) and myself. The purpose of the focus group was made clear: to air views .... 90 ....
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and to comment on the views of others; it was not the purpose of the group to reach consensus. The role of the facilitator was to make sure the group discussion kept to the point. The meetings were tape-recorded and I took no active part, save to sit back from the group and take notes. The sessions each lasted between 30 minutes and one hour. The transcriptions ran to some 150 pages which were compared to the notes I had made. Transcripts were coded using the NUDIST software program into textual units comprising complete, uninterrupted talk. ‘Readings’ were provided by Craig and myself as well as by an independent researcher, John Phillips. The focus groups explored, both from ethical/green and non-ethical investors, reasons for investing, the issue of returns and compromises between financial
and
moral
issues
and
whether
or
not
‘ethical/green’ investing could make a difference to markets and policy. ‘Precaution’, ‘foresight’, ‘calculation’, ‘improvement’, ‘independence’, ‘enterprise’, ‘pride’ and ‘avarice’ have been identified by Keynes (1936) as the most likely motives. No one was keen to associate themselves from among our focus groups with raw acquisitiveness and greed even among the ‘non-ethicals’. There was some talk about income and capital growth from among non-ethicals. These financial matters were almost entirely absent in the ‘ethical’ focus groups where reasons followed familiar
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ethical avoidance criteria. Here too there is evidence (cf. Chapter 4) that ethical investing is part of a consistent lifestyle: I don’t want it to be divided into two parts, that the money does one thing and I do something else. I mean it’s part of me and therefore it should follow the same sort of principles that I want to in the rest of my life. And a second view: I guess I chose ethical investment because of my political views. I’m involved in the Peace Movement, I’m a great supporter of trade unionism, I hate the idea of other workers being exploited for my profit so I guess it’s all related to things that I consider to be – I don’t want to make any sort of contribution to things that I consider thoroughly unethical. ((Both ‘ethical’) edited version from Lewis, 2001) ‘Ethicals’ were likely to mention ‘foresight’ and ‘precaution’ – including the need to provide for retirement. Also mentioned was the importance of independence, such as: I don’t think it’s so much selfish as looking after yourself which is different, it’s making sure that .... 92 ....
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you don’t have to become dependent on other people at a later stage in your life, because the way the government’s doing pensions these days, they are slashing and slashing because they know that this bulge is coming through and it has to be looked after by ourselves and not by them. ((‘Ethical’) Lewis, 2001) This quotation (textual unit) is not only about independence but about the relationship between the individual and the state. It is perceived that the government will provide less in pensions in the future and that individuals need to fill the gap. The motive to bequeath came up often for ‘non-ethicals’ and for ‘ethicals’ as would be predicted from the SI and EIRIS interviews: I’m hoping to die before it’s spent so that my nieces will inherit it because I’m quite happy living a very modest life now. I don’t want to go to an old people’s home and have them whip it all away, I’m praying I won’t do that. Because it must be lovely to get a nice little nest egg from some elderly aunt. I never got one and I think it would be so nice if someone said ‘Oh whoopee Auntie died, she’s left us all this to enjoy’. ((‘Ethical’) edited version from Lewis, 2001) .... 93 ....
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There was some sympathy from among non-ethical investors when the idea of the ethical investment was introduced to them by the facilitator; approximately twice as many textual units were favourable as opposed to unfavourable. ‘Non-ethicals’ believed that ethical/green funds under-perform, and that this fact reluctantly meant they could not invest in them. As would be predicted from the quantitative evidence, some of the ‘ethicals’ believed that their investments performed perfectly well, which made it an easy matter to invest in this way; others said they did take a loss and were prepared for this, provided that the ethical criteria were tightly adhered to. Many of the ethical investors claimed not to be much interested in money and felt uncomfortable about investment in general – here are two short edited examples from Lewis, 2001 I mean I dislike capitalism per se but on the other hand … when you retire suddenly somebody gives you some money and you’ve got to do something with it … So it’s a question of finding something to do with it which is not subverting the whole of one’s philosophy I think. And When we first started investing I just didn’t want to at all because I’d come from a … very Protestant, Quaker background, and it would almost have .... 94 ....
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seemed to be getting money for nothing in a sense, like gambling.
Mixed motives revisited The edited quotations below are representative of the familiar explanations and moral compromises (all quotations are from ethical investors in Lewis, 2001). When asked by the facilitator whether a particular individual felt guilty about holding ethical and unethical investments at the same time she replied: I would say not an extreme amount of guilt but it often crosses my mind ought I to do something about this and so far I haven’t. This quotation is reminiscent of the ‘inertia’ that has been identified before. The next shows that nobody is perfect but one is doing what one can: I can’t say that all my money is invested in ethical funds, but I hope I’m avoiding the worst excesses, I want to. And then there is the question of prudence: … I think it would be imprudent for a group of people or individuals to put all their money in this one ethical basket because that can go out of .... 95 ....
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fashion and if you want money because you are ill or you wanted it for other reasons you may not be able to get it … A married couple in one of our focus groups squared the circle differently. The couple has a dairy farm, and the woman has a separate income working as a personal assistant; they can, therefore, ‘afford’ for her to invest ethically, while her husband does not use ethical criteria in his investments (they compete in a friendly way about the relative performance of each). This lady, and others have done the same, makes what she sees as an important distinction between ‘looking after yourself ’ and ‘being selfish’.
Can ethical investing make a difference? Our respondents certainly think so. Some 60 textual units spoke of the social influence on markets as a gradual process. Here is a good example: And if more people make the statement that they’re going to ethically invest then that may in turn have an influence on other people and change the pattern of investment to make the unethical firms start to look at their practices and change. I mean it’s a very – dripping water on a stone effect. I don’t think investing ethically has a major effect .... 96 ....
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but it may have a timely effect if enough of us decide to do it. (Lewis, 2001) The number of textual units bearing witness to a broadening of awareness was 116; the three below reflect the favour of these remarks: It’s come a long way since it started when ethical funds were laughed at by the mainstream and now at least they are considered to be part of the mainstream and they are starting to have an effect as far as I can see. ■
■
■
Well I think if enough people are investing ethically I mean surely businesses are going to say well there is a lot of people who do care about these things we’d better start cleaning up our act. ■
■
■
… You’ve got to do something haven’t you? You can’t just turn a blind eye even though you’ve only got a little voice. If enough little voices say enough then perhaps something will change. And certainly government policy ought to change. (All from Lewis, 2001) .... 97 ....
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Respondents feel part of a movement which can change markets in the long run and this is a pertinent aspect of their motivation to invest.
Active engagement Historically the authenticity of ethical unit trusts has been based on ‘avoidance’ criteria and indeed this is what the consumers appear to want. More recently some funds have considered ‘active engagement’ as a supplementary activity. Rather than avoiding companies that are behaving badly, or withdrawing from them when their ethical credentials falter, ‘active engagement’ requires that fund managers try and influence companies from within. This is reminiscent of Albert Hirschman’s distinction between ‘voice’ and ‘exit’ (Hirschman, 1970): one way to influence an establishment is by leaving it; another way is to stay with it and lobby for change. These alternatives were put to members of our focus groups. Perhaps to the disappointment of Craig Mackenzie, the facilitator, reactions to this idea were not favourable. There was a feeling that active engagement was ‘too political’ and that the idea of changing ‘bad’ companies by investing in them was like joining a political party whose policies you disagreed with in order to alter them. Employing a medical metaphor, one participant believed there might be merit in making ‘borderline’ companies .... 98 ....
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more ethically healthy, but there was no point trying to treat those that were ‘hopelessly sick’. Questions about active engagement were also included in our questionnaire survey of 1,146 ethical investors (Lewis and Mackenzie, 2000a). Four questions (with subsections) were relevant and covered the favoured role of funds offering ‘passive signalling’ (avoidance) compared to those employing ‘active engagement’. The results show that large majorities support the status quo: 93% agreeing that they want to avoid companies which are doing harm; 92% agreeing that they want their investments to help those companies which are making a positive contribution to society (i.e. ‘passive signalling’); 87% replying that they want their investments to be ethically clean. In contrast, only 16% agree with the statement: ‘I don’t mind if my investments are in companies which are doing bad things, so long as they are being used effectively to persuade the company to get better’. Five items were specifically concerned with ‘soft’ as opposed to ‘active’ engagement, and these gained moderate support: 62% agreed that ‘I want my money to be used to campaign for companies to change’; 80% felt they would like an ethical fund to offer advice to companies to show them how to improve; 77% that an ethical fund should ‘quietly lobby companies in a concerted way to adopt better policies’; 70%, ‘campaign publicly for com-
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panies to adopt better policies’; 79%, ‘contribute actively to debate about corporate ethics to the development of public policy’; 86%, ‘work with other investors to promote higher standards of corporate ethics’.1 When a stark alternative was provided to respondents between ‘a fund that concentrates on avoiding companies that are failing ethically, but has little impact on changing corporate practice for the better’ and ‘a fund that concentrates on actively lobbying to change corporate practice for the better, and invests in companies that are failing ethically in order to try and reform them’; 41% prefer the former as the answers to other questions would predict and 27% the latter. The support for the status quo is less pronounced in this question; the fact that 32% failed to make a choice perhaps points to a distancing from the assertion in the first alternative that ‘avoidance’ has ‘little impact on changing corporate practice for the better’. What do interested investors believe should happen when they discover that a company in which their EUT has shares is now acting unethically? Of the respondents, 39% felt those shares should be sold immediately. Only around 20% felt that the shares should be held on to until the EUT can sell them at the best price, although this is common prac-
1
These five items together were consistent and reliable. Cronbach’s
alpha = 0.839.
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tice. There is a consistency between a preference for avoidance and selling immediately when a company goes astray (x2 = 84.7 df = 6 p < 0.001). Symmetrically the minority who favour lobbying and investing in companies that are failing ethically show a greater-than-expected preference (compared to chance) of sticking to a company that errs. From this evidence it seems that there is no obvious demand for ‘active engagement’ from among consumers, it is more likely to be on the agenda of the ‘suppliers’. Nevertheless, there is support for ‘soft engagement’ where if a previously ethical company goes off the rails, the EUT fund managers should lobby it to get back on track.
Washing up There are resonances between how ethical investors explain themselves and the marketing literature covered in Chapter 3, although ethical investors are more guarded and realistic. They are not ashamed to say, on occasions, that their choices are driven by a need to salve their consciences – a ‘principle’ that would be unlikely to be playedup in publicity material. Participants go along with the idea that their actions can make for a better world, but accept, like water dripping on stones, that it will take time. Again, one cannot envisage this appealing much to the marketing department – ‘be a drip: invest ethically!’ .... 101 ....
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■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■
They are not ashamed to say that their choices are driven by the need to salve their consciences – a ‘principle’ that would be unlikely to be played-up in publicity material. Participants go along with the idea that their actions can make for a better world, but accept, like water dripping on stones, that it will take time ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■
The material reported in the current chapter helps us unravel one of the twists reported in Chapter 4 – that demand for ‘ethicals’ is inelastic for gains and losses. It seems that for the more committed, accruing money from investments makes them uncomfortable and that investing in a high-performing ethical somehow diminishes intent. We have clues also to aid us with the conundrum of ‘morally-mixed’ portfolios – they are because of inertia, psychological allegiance, a prudence which demands that eggs are not just in one basket, and perhaps the motive most overlooked by economists – the motive to bequeath. The moral responsibility to provide for one’s offspring can supersede the need to steer clear of at least some not-soethical investments.
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The tableau depicted of the ethical investor from these and other results is not of ‘one-dimensional’ economic man, nor of a pure altruist. Margolis (1982) has written about the ‘multiple self ’, in which it is possible to envisage both selfish and altruistic selves. The qualitative material has suggested that there are ‘meta-preferences’ (as Margolis has also articulated). These meta-preferences imply that people have knowledge about their own strengths and weaknesses and can provide reasons for their ethically mixed portfolios. In a sense, the studies reported here are an examination of ‘practical ethics’ where people do the best they can, given motives and responsibilities which frequently do not pull in the same direction. What ethical investors are doing should not be held up to ridicule, rather their behaviour and their explanations are a mirror to wider social issues and contradictions.
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CHAPTER
6
A challenge for economics? John Cullis, Philip Jones and Alan Lewis
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re the data presented in earlier chapters a challenge to the discipline of economics? The answer is ‘yes’ and ‘no’. In the first section of this chapter, ‘No
sweat’, the shifts observed are explained away (at least partially) by the ‘characteristics’ approach of Lancaster (1966). In the second section, ‘Feeling the heat’, an argument is made that the empirical evidence reported here (and in the literature in economic psychology and behavioural finance generally) recommends a move away from the assumptions of the representative economic actor, homo economicus, embracing a new model based on homo realitus. The final section speculates on the implications of this new approach for our understanding of how the stock market works.
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No sweat The simplest way to respond to an observed change in the economy (and in this case the growth of ethical investing) is to argue that preferences have changed. A growing number of people are now more concerned than before about business ethics, environmental damage and so on, and this influences their investment decisions. In this respect, the analysis of the selection and market development of ethical and green portfolios can be accommodated in an approach pioneered by Lancaster (1966) and is known as the characteristics approach to consumer analysis. In his theory the attributes of products are the objects over which consumers have preferences. The second pertinent aspect of this approach is discrete switching at the individual level. Each implication is introduced below in order to fix initial ideas and provide insights into the increasing ethicalness or, for short, the ‘greening’ of the stock market. To make matters simple, initially consider a portfolio of securities or shares that only has two attributes – ‘greenness’ and risk corrected monetary rate of return – and a consumer who has already decided how much to spend on this commodity. Individual preferences over ‘greenness’ (G) and risk corrected monetary rate of return (R) are captured in the utility function: U = U(G, R). Utility depends on the quantities of attributes .... 108 ....
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of G and R per period. This utility function can be visualized as an indifference curve map. The total differential provides a linear approximation of what happens to U (utility) as small changes, dG and dR, are made to the quantities of attributes G and R per period respectively. Now generally more G(R) raises utility by an amount that is the marginal utility of G(R) U/G (U/R). By definition, total utility cannot change along an indifference curve and, hence, the value of the total differential is constrained to be zero. In symbols: dU = U/G dG + U/R dR = 0 and by rearranging dG/dR = U/R/U/G The slope of an indifference curve is the marginal rate of substitution between R and G and equates with the negative of the ratio of the marginal utility of G to the marginal utility of R. A pictorial way of representing individual preferences is illustrated as Figure 6.1. It must be emphasized that the economist has no control over individual preferences and theory is about exploring the properties of different cases. In Figure 6.1 characteristic 1 ‘greenness’ is on the y axis and characteristic 2 ‘risk corrected monetary rate of return’ on the x axis. Panels (a), (b) and (c) illustrate some useful .... 109 ....
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G
G I0
I1
G I2
I2
O
R
O
I2
I1
I1 I0
I0
R
O
R
(‘Sinners’)
(‘Mixed motives’)
(‘Saints’)
(a)
(b)
(c)
FIGURE 6.1
■
Preference maps
shapes for analysis. Prior to relatively recent developments, panel (a) would be deemed to be appropriate in that the depicted individual is only concerned with the ‘risk corrected monetary rate of return’ so that U/G = 0 and the slope of an indifference curve is infinite with eastward movements indicating higher levels of utility. Panel (b) illustrates the intermediate case where the individual is positively concerned with the ‘risk corrected monetary rate of return’ so that U/R > 0 and ‘greenness’ so that U/ G>0 and the slope of an indifference curve is negative with eastward and northward movements indicating higher levels of utility. In panel (c) the extremely ethical individual is .... 110 ....
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found being only concerned with the ‘greenness’ so that U/R = 0 and the slope of an indifference curve is zero with northward movements indicating higher levels of utility. Purely ‘Green’ individuals have a map like panel (c) and purely ‘Red’ individuals have a map like panel (a). The simplest way to accommodate the growth of ethicalness would be to view it as a change of preference over characteristics panel (a) towards (b) and (c). The majority of ethical investors, based on the evidence of this volume, are best described by panel (b): they are neither wholly ‘saints’ (Green) nor ‘sinners’ (Red); they are driven instead by mixed motives. In Figure 6.2 the characteristic of ‘greenness’ is again on the y axis and risk corrected monetary rate of return on the x axis. The individual is assumed to have mixed motives, the indifference curves are, therefore, gently sloping rather than entirely flat. A ray from the origin shows in its angle the fixed combinations of each characteristic embodied in each portfolio ‘brand’ that individuals intend to purchase. There are rays representing a ‘green’ portfolio a middling ‘yellow’ and a ‘red’ one. The discrete switching implication at the level of the individual can now be seen in contrast to the general case where marginal adjustments in response to a change of economic stimulus is observed. If the price of the green portfolio rises, point 1 migrates south-west along the green-portfolio ray. If
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G ‘Green’ portfolio ‘Yellow’ portfolio 1 1’
‘Red’ portfolio
4 2 1” I2 3
I1
I0
O
FIGURE 6.2
R
■
The ‘Greenish’ investor
the price rise only moves point 1 as far as 1’, then nothing happens. It is only after point 4, which enjoys the same indifference level as point 2, that utility maximization indicates a change of purchase pattern. For example, if a price change makes point 1” attainable, the individual depicted will com.... 112 ....
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pletely switch from the green portfolio to the yellow portfolio moving to 2 on I1. This could be said to fit the data presented in Chapter 4. Ethical investors seem prepared to take a loss, which is why nothing happens between points 1 and 1’. Saints aside, there will come a point (1”) when the losses become too great and the amount invested ethically falls (the move to the yellow portfolio). Note that the utility maximized is not wealth alone but utility gained from a varying combination of ‘greenness’ and return influenced by the price mechanism. Whilst this approach clearly has some purchase on the results recorded in other chapters and the ethical movement in general, its description of the processes involved relegates the explanation of the growth of ethicalness to a change of preference over characteristics. Observers of and commentators on the growth of ethicalness see the process as much more fundamental and deserving of a more profound explanation. The starting point of a deeper understanding is to question the representation of the individual that is portrayed in economics.
Feeling the heat In microeconomic theory, the neo-classical world is the home of homo economicus. Homo economicus is described by reference to three axioms: (a) the individual is .... 113 ....
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■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■
Homo economicus is described by reference to three axioms: (a) the individual is ‘rational’; (b) the individual is egoistic; (c) egoisim takes the form of economic self-interest in narrowly defined terms (i.e. homo economicus is a personal wealth maximizer) ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■
‘rational’; (b) the individual is egoistic; (c) egoism takes the form of economic self-interest in narrowly defined terms (i.e. homo economicus is a personal wealth maximizer) (e.g. see Brennan and Lomasky, 1993). Who would recognize relatives, friends or acquaintances by reference to such austere defining characteristics? When economists describe ‘rational’ behaviour, it is with reference to a ‘transitive ordering’ of preferences (i.e. if an individual prefers X to Y and Y to Z, then it is ‘rational’ that individuals prefer X to Z). Rational behaviour is consistent behaviour; this requirement enables theory to yield prediction. Homo economicus is instrumental, rationally incurring costs only to maximize self-interest. Moreover, predicted behaviour depends only on changes in the constraints faced. Tastes and preferences are determined .... 114 ....
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exogenously and assumed to be constant. Behaviour is a response to changes in constraints, i.e. to changes in relative prices and income (Stigler and Becker, 1977). Such abstraction is justified by reference to Occam’s Razor; theory should rely on the minimum assumptions required to yield sustained prediction. At the same time, students of economics are assured that analysis of homo economicus is sufficient to explain and predict market behaviour because empirical research supports such analysis. Findings in the current volume challenge this complacency. In the first instance, analysis has focused on behaviour which suggests far more than self-interest. Of course, it is not necessarily implied that ‘altruistic’ behaviour is motivated by altruism. If ‘ethical’ investment produced high rates of return and a more attractive equity portfolio, investors’ motives would be in question. However, questionnaire analysis, discussed in Chapter 4, reveals that 42% of respondents believed that they received lower rates of return from ethical investment and also that many are prepared to accept even lower rates (Lewis and Mackenzie, 2000b). Experimental evidence also confirms such selfdenial (Webley, Lewis and Mackenzie, 2001). At the same time, results reported in earlier chapters question the way in which individuals are assumed to make decisions. Responses are not easy to reconcile with a ‘representative’ individual who defers only to a net expected
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utility-maximizing calculus. Instead, empirical results are consistent with others reported in experimental economics and cognitive psychology, suggesting an alternative ‘anomalous’ behaviour. Such evidence is not always welcome to economists; behaviour is dismissed when it is referred to as ‘anomalous’.1 However, anomalies are ubiquitous and, perhaps even more importantly, they are systematic. Not only has research revealed that individuals are capable of altruism, it also confirms that the way in which individuals make decisions differs markedly from the way in which homo economicus would make decisions. In the next section questions are raised as to how a representative individual should be described. Can the research findings reported here be reconciled with behaviour predicted of homo economicus? If not, can the description of homo economicus be easily amended to accommodate ethical investment? More broadly, the focus in this section is on the question of whether results, drawn from a literature identifying altruism and anomalies, forms a fundamental rejection of the proposition that homo economicus is representative. The emerging discipline of eco-
1
Some argue that such behaviour can be dismissed as ‘mistakes’
(Wittman, 1995) but such ‘mistakes’ are not random. The ‘mistakes’ are repeated time after time in experiments and do not ‘wash out’ of analysis.
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nomic psychology claims greater insight than that offered by the narrow framework of neo-classical microeconomics. If so, how would the ‘representative’ individual in economic psychology be described? Would such an individual invest ethically?
When ‘homo economicus’ meets ‘homo realitus’ Anomalies are ubiquitous; they occur in every aspect of decision making, e.g. when individuals face consumption choices, make investment decisions and/or assess production options (see Thaler (1994) for a survey). However, to date there has been no attempt to synthesize this evidence; no attempt to describe the implications for a theoretical analysis of a representative individual. It will become evident that ethical investment is difficult to reconcile with the predicted behaviour of homo economicus. Research findings on ethical investment, together with those from a growing empirical-based literature describe ‘homo realitus’ (not homo economicus). How can behavioural responses of homo economicus and homo realitus be compared? The discovery of a trade-off between financial return on investment and ‘altruistic’ concern for the nature of investment does not, automatically, sound the death knell of homo economicus. That individuals have an inelastic demand for .... 117 ....
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ethical shares with respect to financial return is not inconsistent with a neo-classical microeconomic framework. In the first instance, willingness to forego returns on investment does not, of necessity, imply altruistic motivation. If individuals believe that such action will enhance reputation among friends and acquaintances, a lower pecuniary return may be a price worth paying. If ethical investment is fashionable, such behaviour might be analyzed in exactly the same way as any other ‘conspicuous consumption’. If ‘self-denial’ opens doors (by impressing a new network of influential friends) ‘philanthropy’ might represent an option yielding longerterm financial gains. Other studies of altruism reveal that individuals can give to charity under pressure from a workplace superior (e.g. Keating, 1981) and that volunteers offer labour with the objective of enhancing curricula vitae.2 Also what of the long run? Close analysis of press coverage of ethical investment betrays such concern. For example, in Chapter 3 it was found that press coverage and EUT publicity alerted individuals that ‘investing ethically is somehow getting ahead of the game’. The prospect of government regulation indicated future enhancement of the value of ethical shares.
2
When businesses sponsor charitable events, a ‘pay off ’ may be
expected in terms of image. Such expenditure can be analyzed in the same way as advertising and marketing.
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Yet, even with such qualification, it is difficult to deny that ethical investors in questionnaire surveys are devoid of altruism. In Chapter 4 it was reported that these individuals are not ‘cranks’. They are concerned with broader concerns, many having interests in other religious and/or charitable organizations. They are drawn, in the main, from middle-income professional groups where ethical investment is unlikely to prove the main form of access to a social network. Many are retired, so the desire to impress others in the hope of future career advancement is unlikely. Moreover, responses do not smack of instrumentalism; there is little evidence that decisions are part of a long-term self-interest strategy. There is more here than self-interest. However, economists will respond that their analysis can accommodate altruism. Frank (1996: 1) emphasizes that rational choice requires only that a person ‘… acts efficiently in pursuit of whatever preferences she happens to hold’. Rational action can be assessed whatever the maxim and neo-classical economists accommodate altruism by assuming that individuals have interdependent utility functions. The well-being of others enters the utility of the representative individual. Specific and generally interdependent utility functions have become the conventional way by which neo-classical economics incorporates concern for others (an analysis which makes ‘equity’ an ‘efficiency’
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issue).3 Hochman and Rogers (1969) explain generalized redistribution by reference to more simple interdependence – concern for those below a certain income level.4 Surely there is room to adapt self-interested homo economicus to explain ‘rational’ altruism? If this route is taken, it is important to recognize its limitations. Economists argue that individuals experience a ‘warm glow’ from acting altruistically (e.g. Andreoni, 1988). The act of altruism yields utility, as would consumption of any good or service. Such an act may reaf-
3
Interdependent utility functions can be described with reference to
equation (1) where the utility of individual A (an altruist) depends not only on the consumption of goods and services (x1 … xn) but also on the utility enjoyed by another individual, B: Ua = U(x1 … xn, Ub) and where
Ua/Ub >
(1) 0. Specific interdependence would arise, for
example, where it is (specifically) the consumption by B of a specific good or service (e.g. medical care) which entered A’s utility functions, e.g. Ua = U(x1 … xn, mb)
(2)
where mb is B’s consumption of medical care and Ua/mb > 0. 4
Moreover, this approach can also be adapted to deal with malice and
envy; individuals experiencing loss of utility as others are made better off (see Brennan, 1973).
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firm an individual’s perception of self-worth. It may also yield utility if individuals believe there to be intrinsic value in the ‘act’ of doing good. Defined in these terms, altruism may motivate individuals to accept lower financial return than would self-interested homo economicus. Some statements reported in this study of ethical investment are easy to understand. For example, the finding that sociably responsible investors agree that much of what they are doing is salving their own consciences (Chapter 5). Yet, the real problem for neo-classical microeconomics arises when ethical investors ‘fail’ to act ‘rationally’. The problem arises when the focus of attention falls on the different ways in which ethical investors make decisions. For example, this study of ethical investment is consistent with the view that individuals make decisions by reference to mental accounts (Thaler, 1994). In Chapter 5 it was shown that money invested ultimately intended as a bequest to offspring or inherited money rather than investments taken out oneself, are both treated differently. This challenges fundamentally the relevance of homo economicus because it implies that individuals do not consider income or assets irrespective of source or purpose. There is no fungibility between accounts. Frank (1997: 247) argues that the use of ‘mental accounts’ calls in question ‘… one of the most cherished tenets of the
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rational choice model’, i.e. the assumption that money is ‘fungible’.5 Ethical investors are not making decisions as predicted by neo-classical microeconomics. Nowhere is this more obvious than in their willingness to support funds whose representatives are actively engaged in changing corporate practice. The implication is that homo economicus is not simply concerned with the ‘act’ of altruism, there is also the desire to achieve altruistic results. When homo economicus is motivated by an altruistic ‘end result’, neo-classical microeconomics describes altruism as a public good (Hochman and Rogers, 1969; Collard, 1978). By definition, public goods are non-excludable; when they are provided for one they are provided for all (Buchanan, 1968). If individual A’s utility function included the utility of
5
Solow (1987) notes: ‘We (economists) think of wealth as fungible.
We think a dollar is a dollar. Why don’t they?’ Evidence suggests that the allocation of savings differs according to which ‘mental account’ income is attributed (i.e. to a ‘current income account’, to an ‘asset account’ or to a ‘future income account’). Winnett and Lewis (1995) identify ‘mental accounting schemas’; the use of income depends on the distinction between liquidity, windfall/regular and capital/labour income. In a study of household saving they discovered that ‘… all income from capital is classified as non-spendable’ (p. 441).
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individual B, individual A may be made better off if others bear the costs of assisting B. It is now ‘rational’ for A to hope to free ride, but if all adopt this strategy then no one bears the costs and there is no assistance for B (for further discussion see Jones, Cullis and Lewis, 1998). However, ethical investors are not free riding. For example, in the USA, in 1997–9, $657 billions were assigned to funds which involved shareholder advocacy. When applying neo-classical microeconomics to the question of whether an individual would voluntarily contribute to an association intent on lobbying, Olson (1965) predicted that individuals would prefer to free ride and hope that others would bear such costs. Indeed, Olson (1965: 64) emphasized that: ‘even if the member of a large group were to neglect his own interests entirely, he still would not rationally contribute …’. But this is not the case. In the questionnaire response, a substantial percentage (27%) of ethical investors preferred ‘a fund that concentrates on actively lobbying to change corporate practice for the better’, even if this also implied investment in companies failing to act altruistically in order to reform them (Chapter 5). Individuals want results; the ‘act’ of ethical investment, in and of itself, is not enough. Individuals do not opt to free ride (as would homo economicus) and this conclusion is repeated in almost all experiments designed to test the freerider hypothesis (for a survey, see Ledyard, 1995).
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There is no possibility of minor adaptation of the defining axioms of homo economicus (with or without interdependent utility functions). How then should a representative individual be described? The following defining axioms are based on evidence reported in this volume and supported in a broad empirical-based literature. (a) homo realitus exhibits bounded rationality. Most behavioural studies reject the proposition that individuals mechanically maximize net expected utility. Cullis and Jones (1998) refer to individuals deferring to: sunk cost, endowment effects, framing, reference point, anchoring, overconfidence, preference reversal, opportunity cost, certainty, small probability, availability bias, representativeness bias and hyperbolic discounting effects.6 Such behaviour is anomalous with respect to the way in which homo economicus should make decisions. 6
If, as Hegel (cited by Knox, 1952: 230) profoundly observes: ‘The
rational is the highroad where everyone travels, where no one is conspicuous’, then that highroad is surely not sign-posted with the axioms of expected utility theory. Rather it is littered with an array of partially analyzed, yet systematic, heuristic responses. The likes of transitivity, strong-separability and the usual rules for combining lotteries have to be replaced by preference reversal, indifference curves that fan out over the probabilities and subjective probabilities that are the product of all sorts of systematic distortions.
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(b) homo realitus is capable of benevolence (and malevolence). Increasingly research identifies a more complicated actor, capable of a more sophisticated range of actions. The conclusion drawn with respect to ethical voters is not that all such investors are ‘saints’. With reference to ethical investors it could be concluded that it is better to think of a multiple self. Individuals are multifaceted, encompassing a multiplicity of motivations (e.g. see Kuran, 1990; Chirinko, 1990). To accept this proposition is to acknowledge a ‘richer’ analysis. For example, it offers insight into why individuals make utility-enhancing investment decisions that could alter the nature of people around them (e.g. Guttman et al., 1992; Roback, 1989; Jones, Cullis and Lewis, 1998). When Thaler (1994) explored the implications of mental accounting, he revealed how such decision making incorporates perceptions of ‘fair’ prices. Thaler argued that consumer decision making involves two sources of utility. One element in total utility is ‘acquisition utility’ (utility from the good or service itself). The second element is ‘transactions utility’ which depends upon the price outlay for a good compared to a reference price which is deemed fair. The way in which goods and services are priced and perception that prices are ‘just’ is important. Similarly, the way in which shares are supplied and their perception of being ‘ethical’ delivers transactions utility.
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■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■
Homo realitus is capable of altruism; financial return is not everything. Decisions reflect a mental accounting in which context is important ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■
(c) homo realitus relies on endogenous preferences. It has been recognized in the so-called preference reversal paradox that preference and willingness to pay are not the same things in that experimental evidence suggests that people prefer one lottery over another but are willing to pay less for the lottery they prefer (Grether and Plott, 1979). This strikes at the heart of neo-classical theorizing where willingness to pay reflects preference. Additionally, debates revolving around the Allais Paradox suggest that choices depend on how issues are framed (Hirschliefer and Riley, 1992). The way in which decisions are perceived matters and here institutional context facilitates predictions. Institutions affect the reference frame (Bowles, 1998, provides a literature survey). For example, a substantive literature indicates that individuals are not solely motivated by changes in constraints, i.e. in the amount of income they receive or the extent to which relative prices are changed. But, once again, how changes are effected matters. For .... 126 ....
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example, Frey (1992, 1997) showed that the way in which payment is made for a service (e.g. in terms of a contractual arrangement or an unsolicited gift) affects motivation. A literature based on Titmuss (1971) indicates that individual behaviour differs as between markets and non-market environments.7 In markets, individuals are faced with analysis of costs and benefits which are more obvious than within non-market arrangements. Reviewing the literature, Frey (1992: 163) goes so far as to comment that the ‘dominant view’ is that ‘… the price system destroys morals’. Results from the focus groups (Chapter 5) and the questionnaire survey (Chapter 4) suggest that ethical investors share the view that ‘money’ can corrupt. Respondents have specifically stated that their involvement in the stock market is reluctant involvement. Inelasticity for losses has been recorded and it should be noted that there is evidence of an inelasticity for gains as well; just 61% agreeing they would invest more ethically if those investments were to out-perform ‘ordinary’ investments by 12% compared to 10%.
7
For example, Ware (1990) argues that, with greater reliance on
markets, ‘… habits, conventions and principles which support aid for others are weakened when cost/benefit calculations of self-interest are even contemplated …’ (p. 191). Michelman (1967) argues that the market creates a ‘commercialization effect’ (and many others share the same perception, e.g. Hirsch (1976)).
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Homo realitus does not engage mechanically in the calculus expected of homo economicus. How money is received; how earnings are achieved matters. Homo realitus is capable of altruism; financial return is not everything. Decisions reflect a mental accounting in which context is important. But does all of this imply that it is impossible to make theoretical predictions? Has the analysis become tautological? (e.g. individuals act altruistically because they prefer to act altruistically). The implication from the above analysis is to the contrary; prediction is still possible. Prediction might require closer analysis of values and moral commitment (endogenous preferences), mental accounting and the relationship between reference frame and preference. However, it is not necessarily precluded. The objective in the next section is to illustrate this by comparing predictions of market behaviour when market forces are dependent on the behaviour of homo realitus and when markets are populated by homo economicus.
Stock market analysis At the risk of being too simplistic, in this section the two constructs of homo economicus and homo realitus are retained and employed with respect to the discussion of the stock market. In particular, two issues are briefly discussed: .... 128 ....
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1 types of investors; 2 the significance of the stock market.
Types of investors It is convenient to divide stock market investors into two types, the investment investor corresponds to homo economicus, whilst the consumption investor corresponds to homo realitus. The investment investor is purely driven by pecuniary considerations and the utility generated from stock market participation is indirect in the sense that it will be achieved via having maximized expected income or wealth from investing activity and then using this income or wealth to purchase utility-generating goods. The rate of return is pecuniary. Like all actors in the neo-classical world, this type of investor is result or outcome-orientated and the notion of individuals driven by end state or more simply outcome utility is dominant. The consumption investor is seen as getting utility directly from the activity of participating in stock market transactions and whilst pecuniary return may be one source of utility other attributes of the activity are important in themselves. The consumption investor is mainly in receipt of a psychic non-pecuniary rate of return on his or her investment activity. Given the discussion above, it is clear that the ethical investor can be viewed as a type of consumption investor who is in receipt of process utility. Influencing and
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■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■
The ethical investor can be viewed as a type of consumption investor who is in receipt of process utility. Influencing and being influenced by the process of ethical investing is important in itself; it may not be the winning but the taking part ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■
being influenced by the process of ethical investing is important in itself; it may not be the winning but the taking part. It is not suggested that these stylized caricatures perfectly describe all donors as any donor may conceivably be a blend of both investment and consumption investor.
The significance of the stock market In many ways the stock market is the quintessential market in that it appears to have the characteristics that come to mind when the word market is employed in everyday conversation. However, the mechanics of how the stock market actually works is the object of considerable debate as it is an area where there is a wide gap between the theorizing of the academic economist and more empirically based statements and actions of the market practitioner (see Chapter 3). This debate separates out those individu.... 130 ....
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als who see the stock market as being driven by economic forces and those that see it at least partly as an elaborate gambling game. For the academic economist, the area of theorizing that deals with stock market predications is that of rational expectations. The notion of rational expectations is built around optimizing individual behaviour (homo economicus). It argues that an individual will use all information available to them (this may be past, public and private information) combined with an economic model in order to make a prediction. In this type of world, the forecast made will be on average correct, have errors that exhibit no pattern and a variance that is as small as can be. It is not an actual requirement of the theory that this is what individuals actually do, rather it is about examining the predictions that would arise if the world was ‘as if ’ they did this. In this context the stock market has serious economic value in that share prices will reflect all relevant information on the expected profitability of companies and the extent to which the risk involved with each company is not correlated with the other quoted companies in the market. In this world efficient companies will find it easy to attract funds for expansion and inefficient ones difficult to attract funds. Furthermore, as inefficient companies will have a stock market price suitably reflecting their lowered, as compared with their potential, discounted present value of expected profits, they will be
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vulnerable to takeover and the displacement of inefficient management teams by efficient ones. In these ways the stock market disciplines the inefficient company and rewards the efficient one. The rational expectations approach is closely connected to the efficient markets hypothesis which entails the prediction that given all information is used in a ‘correct’ economic model to form forecasts, it would be impossible for any individual to systematically make abnormal profits. If abnormal rates of return are systematically earned, it must be the case that either information is being systematically ignored, the wrong model is being used or both. Given the rational expectations theorizing, these inefficiencies cannot be sustained in the long run. Those making systematic errors will be driven out. Since all relevant information is in the price, only new information can cause stock prices to change, and given the random nature of new information arrival stock prices should also follow a random path. In short, it is impossible to systematically beat an efficient market and on average earnings represent a normal rate of return. Rates of return when corrected for risk exposure would always be identical. If rates of return were not equalized in such a manner, investment investors would simply move funds, depressing rates of return where they were abnormally and high raising them where they were abnormally low.
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In sharp contrast with this, is the view of the stock market as more or less an elaborate gambling game. This is in part associated with the work of Keynes (1936) who saw stock market price forecasting as being governed by ‘what average opinion expects average opinion to be’. Here the market has much less serious economic content. A more recent exponent of this type of view is the American economist Shiller (1990). Shiller sees the stock market as containing at least two different types of actor, the so-called ‘smart money’ actor has the attributes of rational expectations and is seen as arbitraging out any stock market price abberations. The majority of actors, however, are described as ‘noise traders’. These are individuals who are susceptible to being driven by ‘fads and fashions’. The interconnections between the smart money traders and the noise traders are seen as producing stock market prices that are ‘too’ volatile in comparison with changes in underlying fundamental factors. The individuals who make abnormal returns in the stock market are generally seen to be noise traders who have turned out to be lucky (they, of course, attribute their success to their superior market knowledge!). This is not to suggest that the growth of ethicalness is simply a fad or fashion that is temporary as the evidence of this book is contrary to this. Rather this perspective does suggest that there will be some actors in the stock market who will climb on any newly arriving band wagon includ-
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ing the ethical one causing reactions in share pricing that are not consistent with rational expectations or the intentions of those attempting to foster ethicalness.
Some contradictions and conundrums Quite how the stock market works, as we have seen, is contested among economists and other commentators. The assumptions of homo economicus fit most neatly with rational expectations and the efficient market hypothesis. We can even allow a number of ethical investors to ‘exist’ in this world as homo realitus will be swamped by the forces of homo economicus. Homo economicus will invest in ethicals if these are giving superior returns. (Yet, even here there are inconsistencies, as Webley and Lewis (1994) have shown, there is a certain wariness in investing ethically among ‘ordinary’ investors even when they are performing well.) Symmetrically businesses whose ethical (or for that matter, unethical) practices are not linked to profit maximization will be punished by the market. For economists who make up the Chicago school, the market is already providing the goods and services that people demand. Businesses produce other things besides goods and services … externalities like pollution. Reducing that same pollution voluntarily could make the company less competitive. Ethicals could leave the polluting companies .... 134 ....
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and go for the non-polluting ones, but this would falsely reduce the share price of the polluting company and the ‘smart’ money would move in. Economists not so enamoured with the Chicago school are more likely to believe that ‘free’ markets cannot solve pollution and other problems; that there is ‘market failure’ (ethical investors have similar views but would be unlikely to use the same terms). A conundrum arises. If ethicals perceive that wider markets fail to deliver (because of unacceptable externalities of various kinds), why choose the stock market to put it right? If the wider market is deemed inefficient, surely the stock market will be as well. The focus groups revealed (Chapter 5) that ethical investors do not feel they can have a direct and immediate effect, but they do feel the atmosphere is changing and that they are contributing to that change. Cigarette and armament manufacturers have not been put out of business, nevertheless lobbying by fund managers, and work of shareholder ‘activists’ have had some successes (and this theme is developed further in the concluding chapter). Neither have investors swallowed whole the rhetoric of EUT publicity (Chapter 3). Successful firms may well be socially responsible ones, but it does not follow that social responsibility (of whatever kind) alone will lead to economic success. We are still unable to predict which socially responsible firms will be successful and which ones will not.
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In this chapter it has been shown that some of the results can be ‘explained away’ using the characteristics approach of Lancaster (1966). Yet, the empirical work adds to the growing literature calling for a more realistic homo realitus in economic analysis. Homo realitus thinks and indeed acts differently to homo economicus and is driven, to a greater or lesser degree by aspects of moral commitment and social responsibility. This new ‘representative’ actor is a challenge to neo-classical thought. Rational economic man is no longer ubiquitous; there is a growing trend to classify actors into types, e.g. ‘smart /noise traders’; ‘investment/consumption’ investors. The movement away from the rational expectations model invites complexity not only in the ‘types’ of people who inhabit the marketplace but the unequal power they yield, even that markets are ‘socially constructed’. These are challenges indeed. Economists agree that ethical investing could make a difference, but there may be an inconsistency in the belief that an inefficient stock market (also obfuscated, on the supply side, with people with moral values and ‘irrational’ decision-making processes) will respond appropriately to their preferences. There is agreement also that the market cannot be beaten, many also see evidence of fashionable and faddish trading. Given the history and continued growth of ethical investing, and the commitment among
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individual investors and activists, it would seem imprudent to dismiss ethical investing as mere ‘fad’ or ‘fashion’. Perhaps ‘market failure’ should be corrected by appropriate government intervention (e.g. increased fines for polluters) and there may be inconsistencies in attempting to correct those failures through the stock market, yet ethical investors feel a genuine need to act as neither the wider market nor the government provides what they believe is required.
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CHAPTER
7
Policy, politics and behavioural finance
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W
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e have seen that there is a limit to what individual ethical investors can achieve – they are aware of this and see their influence as indi-
rect and long-term, but still worthwhile. When considering ‘markets’, the dimension of power is often ignored (Jones, 1996) – some participants in markets, some economic actors, are more equal than others. Committed fund managers, IFAs and other financial ‘activists’ can be much more influential than any individual investor, yet they need the support of a body of investors, otherwise they would be left to howl at the moon. These prominent actors are not necessarily persuaded by the efficient market hypothesis beloved of economists; they feel they can shape the market from within. This perception leads, philosophically, to the assumption that the market (and
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its workings) has no special status as an ‘objective truth’, rather it is socially constructed by the participants. How markets work is, therefore, contested – it should not perhaps be taken for granted that the positivistic view of mainstream economists should be either the correct or predominant viewpoint. ‘Activists’ in any case want to change the world, not analyze it from a distance. According to Mansley (2000) and Mackenzie (2000), financial markets exhibit glaring examples of inefficiency. One is the underestimation of the strength and persistence of ‘public opinion’.1 Consumers’ and investors’ distaste, for example, for genetically modified foods came as something of a surprise: relevant shares have fallen as a result and have not recovered their earlier value. Another is the relationship between ‘brand risks’ and social, environmental and ethical considerations. The brand assets of clothing and sports goods can account for some 40% of total assets. The unpleasant news that these same companies use child labour could badly affect their image and result in a loss of
1
‘Public opinion’ can be ephemeral. ‘Endogenous preferences’, the
term favoured by economists, is a ‘catch-all’ which includes the trivial alongside the deep-seated. What is being observed in contemporary markets is the expression of relatively strongly held social and moral values.
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brand assets and reduced shareholder value. The divestment of ethical investors and cupboard skeletons discovered by investigative journalists, together can have powerful effects on the corporate public persona. One of the biggest actors in the market is the government. In July 2000 new legislation required private-sector pension funds to consider social, environmental and ethical aspects in their investments. With this move, the commitment of a small number of sympathetic pensions ministers within the DSS, has legitimized ethical investment virtually overnight. At present a good deal of ethical investment is from among individuals, amounting to some £3.3 billion. With this new invitation to institutional investors, ethical investing could rise to some £100 billion within five years (Mackenzie, 2000). Financiers surely can no longer treat this as a side issue. Some politicians would have liked to see more, requiring pension funds to at least invest a portion of their portfolio ethically. This was resisted by the National Association of Pension Funds (NAPF), which rather like the old Department of Trade in the 1970s, argued that a restricted portfolio could be financially irresponsible. In addition, the NAPF was uncomfortable with trustees being asked to be ‘moral arbitrators’ – there was no apparent problem in principle investing in good causes, provided that they in turn produced acceptable profits – they
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baulked at this being compulsory (Independent on Sunday, 25 February 2001). Watered-down or not, this is a significant victory for the ‘movement’. There were other subtle developments around this time which were linguistic: ‘ethical investing’, became ‘socially responsible investing’ (SRI). According to Sparkes (2000a), within the pensions ministry a good deal of advice was taken from lawyers and pensions consultants, much of which was critical of SRI. It shows the strength of political will that the legislation was put in place. And politically the label ‘ethical investing’ had to go: We came to the conclusion that the phrase ‘ethical investment’ came with too much negative baggage, and switched to ‘socially responsible investment’ instead. (Quoted in Sparkes, 2000a) The financial journalist, Melanie Bien (Independent on Sunday, 25 February 2001) views some of the older, ‘deepgreen’ ethicals as ‘virtuous but eccentric’. The newer, socially responsible investments are heralded as being more inclusive – ‘Even a blue chip share can be green’ as they are investments which specifically do not put principles before returns. SRI is likely to be with companies doing some good regardless of the sector. Questions about the authenticity of ethical investments seems to have been relaxed to
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the extent that they have been repackaged to make them more ‘mainstream’. Sparkes (2000a) makes the distinction thus: The main purpose of ethical unit trusts as I see it is to allow as many people as possible to invest in shares without being involved in some activity they detest, within a pooled fund offering the benefits of some diversification, and at a reasonable cost. Return is a secondary factor, as investors in such funds are willing to accept a performance penalty. For pension and charity funds, the primary aim is quite distinct, to generate good investment returns with a SRI framework. Mackenzie (2000) also makes a distinction between ‘hard-line’ and ‘mainstream’ ethicals and queries, somewhat rhetorically, whether exclusion of some 50% of the FTSE All Share Index is altogether a wise financial move for pension funds. In the Friends, Ivory and Sime, ‘evolutionary model’, ethical criteria are not applied to the stock selection process – rather ethical issues are addressed afterwards through active engagement and information gathering. A team from Friends, Ivory and Sime provides the ‘Responsible Engagement Overlay’ (REOTM) gaining better information about the relationships between social, environmental and ethical impacts and shareholder value.
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■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■
It is not the ubiquitous market that is being asked to correct ‘market failure’ but a band of Robin Hood’s men and women in the form of fund managers encouraged by financial legislation ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■
The idea is to protect shareholders (as well as stakeholders in the wider community) from the ‘nasty surprises’ of oil spills, industrial accidents and the like. This ‘softly-softly’ approach is flavour of the month and one can see that it may have a broader appeal than some of the original ethical funds. It is not the ubiquitous market that is being asked to correct ‘market failure’ but a band of Robin Hood’s men and women in the form of fund managers encouraged by financial legislation. Can these few make a difference? Trustees, shareholders and directors will also have to take an active part. Mackenzie (2000) is optimistic, citing clear examples where a failure to respond to social, ethical and environmental questions has had a major impact on earnings: ■
remediation costs faced by businesses: the environmental clean-up costs following the Valdez
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oil spill alone has cost Exxon an estimated $11 billion (Knight and Petty, 1995); ■
irregularities in the UK life insurance industry, associated with mis-selling are likely to cost some £11 billion. Mackenzie, sees that besides avoiding risks, social and
environmental investing presents substantial opportunities: ■
many new companies will arise that are allied to the Kyoto targets for greenhouse-gas reductions and renewable energy, for example, Vestas (a windpower company) has seen its share price rise around 500% in three years;
■
graduates from business schools, who themselves have attended business ethics classes, may prefer to work for socially responsible companies. Non-SR companies may face increased recruitment costs as a result. Fineman, in a series of commentaries and qualitative
studies on how industry responds to ‘green’ issues, is less optimistic (Fineman, 1996, 1997, 2001). Managers are aware that ‘greenness’ and ‘social responsibility’ are currently fashionable, and regularly have one person on the board whose portfolio encompasses these concerns. .... 147 ....
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■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■
Managers are aware that ‘greenness’ and ‘social responsibility’ are currently fashionable, and regularly have one person on the board whose portfolio encompasses these concerns. Nevertheless, the ‘bottom line’ holds sway – ‘green’ issues have to be sold as a profit-making new policy ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■
Nevertheless, the ‘bottom line’ holds sway – ‘green’ issues have to be sold, frequently by consultants, as a profitmaking new policy, otherwise they will fail, argues Fineman. Yet, the ‘greening’ question is persistent ‘rather like an unwanted burr clinging to the corporate overcoat’ (Fineman, 2001: 28). Corporate social responsibility is seen as a threat rather than an opportunity and all too often managers/corporations attempt to reduce this threat, by playing lip-service to the ideas, while at the same time attempting to neutralize the key protagonists. Some companies even employ green/ethical ‘activists’ as consultants and in turn use this as evidence of their ‘progressive credentials’. .... 148 ....
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Other developments More evidence for increased legitimacy is the launch, in the Summer of 2001, of FTSE International’s, FTSE4Good. The four indices in turn, cover the UK, ‘Europe’, the USA and ‘Global’. The FTSE4Good uses environmental, human rights and social issue criteria. The criteria are developed with EIRIS, the selection committee being headed by the chief executive of the Co-operative Bank. Already, Close Fund Management will record the FTSE4Good performance offering ‘index tracking with a conscience’ (Daily Telegraph, 28 February 2001). In the same article the chief executive of FTSE 100 is quoted: FTSE4Good represents an aspirational framework for change. We want it to be a step towards encouraging companies to adopt socially responsible principles. So-called ‘stakeholder’ pensions were introduced in the UK in 2001. One of the six provided by the Post Office will be ethical. The CIS Responsible Share-Holding Unit is lobbying the government to seize this opportunity – on 21 February 2001 66 MPs had signed an early day motion to oblige new ‘stakeholder’ pension providers to promote an ethical stance (Independent on Sunday, 25 February 2001). .... 149 ....
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In a survey conducted by NOP sponsored by EIRIS, 44% of 700 respondents felt their pension funds should operate an ethical policy, provided that returns are not reduced (Independent on Sunday, 25 February 2001). Interestingly, given the evidence about the relative inelasticity of demand as returns fall recorded in Chapter 4, the NOP poll also records that a further 29% felt that their pension scheme should adopt ethical policies even if this resulted in poorer returns: totalling 73% in favour of SRI pensions overall (Sparkes 2000a). Some local authorities have already shown sympathy towards SRI, Nottingham County Council leading the way by its adoption of an SRI policy. Other successes have included British Telecom, Sainsbury’s and the Universities Superannuation Scheme (USS). The USS has some £20 billion invested on behalf of its 153,000 members. All this sounds well and good but agreeing to an SRI policy may not mean very much on its own. The campaign group ‘Ethics for USS’ (see newsletter, Spring 2001, No. 5) feels that USS has yet to put much SRI into practice, inviting readers to write to the chief executive and to vice-chancellors, pointing this out. The USS currently invests £914 million in British Petroleum, £82 million in British American Tobacco, and £44 million in British Aerospace. On the positive side, the USS has recently appointed an SRI adviser, is following a policy of ‘active engagement’ and is integrating
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social and environmental concerns in the investment process. However, the USS emphasizes that it is very unlikely that it would sell shares in a company on a nonfinancial basis. It is here that the differences between the older ethical funds and the new SRIs become most stark: is there any point in lobbying companies which manufacture cigarettes or armaments? SRI enthusiasts might point to the ‘victory’ of persuading the tobacco manufacturer Philip Morris to put health warnings on its products when sold to countries
where
this
is
not
a
legal
requirement
(www.socialinvest.org). What about armaments? One can hardly put health warnings on those. Could you persuade manufacturers to produce weapons that killed quickly and were less likely to maim? Perhaps the only way to desanitize the product is to stress the technical advances so that military targets can be destroyed, and civilian casualties minimized. (The propaganda of the Gulf War is informative here, see Taylor, 1992.) One is bound to ask whether SRI comprises such watered-down ethics that a taste lingers not at all.
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active engagement (Lewis and Mackenzie, 2000b). The major cultural changes have been in the boardrooms and the City of London. There is much more awareness of these kinds of investments and, especially since the repackaging of the ‘old-style’ ethical funds into ‘socially responsible’ ones, they are perceived as less eccentric. And as it has been recorded in Chapter 3 and elsewhere, they get a good deal of coverage in the media, especially in the financial pages of broadsheet newspapers, which in more recent times has been more likely to be favourable than unfavourable. The ‘older-style’ ethical investments ‘play up’ the fact that they invest in companies which make a positive contribution to society (see Chapters 2 and 3), yet their chief characteristic, and the characteristic that most appeals to individual investors, is the exclusions – an unwillingness to invest in the arms trade and so on. These individual investors are not that enamoured with active engagement (see Chapter 5) – active engagement is more associated with SRI, which in turn appeals more to institutional investors.2 The ‘older-style’ ethical investors do feel that
2
The focus group transcriptions (Chapter 5) showed there was rarely
any antipathy towards ethical investing among non-ethical investors but there was concern about poor returns – SRIs may well appeal to a wider public of individual investors as well.
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they are making a difference both indirectly (culturally) and in some rare instances, directly influencing share prices. This is contested by most professional economists who point out that the ethical sector is too small, and opportunists will buy up shares that are ‘falsely undervalued’ by such avoidance tactics. Economic interpretations are far from omnipotent and ‘old-style’ activists contest that share prices can be influenced. One can agree with the activists when circumstances are right, for example, where some major scandal has broken, perhaps a clothing manufacturer has been reported as employing child labour in a Third World country – a threat to its ‘brand image assets’ – coupled with divestment by those particularly concerned with this discovery. The Social Investment Forum in the USA certainly claims that massive divestment in tobacco has created volatility and loss of share value (www.socialinvest.org).3 It must be remembered that cause and effect are notoriously difficult to marry – it is bad enough when assessing how boycotts work in consumer markets, let alone in capital markets (Friedman, 1999). The attractiveness of active engagement is that (including successful shareholder resolutions) while the
3
Some 44% of US hospitals exclude tobacco stocks – while impressive,
the majority are still ‘sinning’.
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victories can be small, they are identifiable. It should also be stressed that cultural change, avoidance and active engagement activities are interrelated: publicized and consistent avoidance, successful shareholder resolutions, and government approbation all contribute to cultural shifts (as well as being responses and consequences of such shifts). From the 1980s in the USA, a wide coalition of 275 Protestant, Catholic and Jewish institutional investors have become involved in active engagement and shareholder activism through the Interfaith Center on Corporate Responsibility (ICCR). Alongside the ICCR have been campaigns to sign up for the Coalition of Environmentally Responsible Economies (CERES) Principles. The principles (first called the ‘Valdez’ Principles after the Exxon Valdez débâcle) are about corporate environmental practice. In the 1990s large companies agreed to sign, including Polaroid, Sun Oil and General Motors. Joan Bavaria, cochair of CERES is committed to influencing a ‘culture change’, and the principles have proven an important catalyst in both the USA and Europe. Shareholder advocacy is fast gaining ground in the USA, with $922 billion invested in 1999, up 25% from 1997. Included in this total are novel combinations of screening and shareholder advocacy at $265 billion (1999), up 215% since 1997. This combination of screen-
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ing (avoidance) and advocacy (engagement) is not yet common in the UK, but may be in the future, especially as the publication of FTSE4Good becomes a regular feature. While the combination approach is the most fashionable, screening (avoidance) alone is still the most popular option – $1,497 billion in 1999, up 183% from 1997 (www.socialinvest.org). According to the ICCR, 220 shareholder resolutions were filed with more than 150 major US companies in 1999 – 54 of which centred on environmental issues. Signing up to the CERES principles is just the thing to get up the noses of critics (Anderson et al., 1996). These authors, at the Social Affairs Units, complain of high compliance costs (but really they cannot be that high); more tellingly perhaps they complain: … suppose he (company executive) thinks that filling in a questionnaire will do neither company or investor or either of their ethical purposes any good, what is he to do? Answer and be damned or not answer and be damned? (Anderson (ed., 1996: 19) Here they may have a point, when the respondent genuinely feels that the questionnaire is badly framed and where the ethical categories and assumptions are poor. .... 155 ....
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More on the role of governments in creating a ‘good’ society Let us consider the ‘free market’, the government and the problem of an ‘externality’, water pollution. One answer to the problem of water pollution is ‘government intervention’: relevant manufacturers could be regularly inspected and fines imposed on miscreants (and indeed in some countries this already happens). At the other end of the spectrum are those who believe that the ‘market’ can solve these problems when left well alone. These advocates usually refer to Adam Smith’s quotation of the ‘invisible hand’ where self-interest promotes a good society, often in tandem with Milton Friedman’s (1962) view that the sole responsibility of companies is to increase profits for stockholders. Ethical investors have told us that they feel neither of these systems work and the ‘failure’ of both markets and governments has motivated them to take some action of their own. As we have often seen, these preferences have been aided and abetted by pioneers and activists and latterly by mild government approval (as yet falling short of explicit incentives to invest ethically or in socially responsible ways). Perhaps we are witnessing some new ‘third way’ where changes in social values and government policy are working together to enhance political change through the conduit of the firm. It is an atmosphere where
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social responsibility is being subtlely transferred from the government to the firm. Even in 1984, in the USA, the former chief executive of Du Pont stated: Leaders in the private sector have quasi-public status [my emphasis] and must accept the public responsibilities that go with this. Private gain remains a necessary condition of commerce, but it is no longer a sufficient one. The objective should be not just to make individual companies perform better but also to make the whole system work better. (Shapiro, 1984) Tomer (1994) talks of firms incurring ‘legitimacy costs’ – the price a firm pays for not being socially responsible where a gap appears between its social performance and what the public expects of it. And people are expecting more. The pensions legislation was passed at a time when there were major reshuffles at the DSS: three ministers in the space of two years (John Denham, Stephen Timms, Jeff Rooker). Given this disruption, it would have been no surprise to see SRI initiatives scuppered. The fact that SRI has persisted suggests that the policy was (and is) actively supported by the highest tiers of government. Sparkes (2000a) quotes Tony Blair (UK Prime Minister):
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It is surely time [that] we shift the emphasis in corporate ethos from a company being a mere vehicle to be traded, bought and sold as a commodity, towards a vision of the company as a community or partnership … Stephen Timms sees it as part of the drive towards greater transparency (again quoted in Sparkes, 2000a): We, as a Government, look to the future with confidence. It is clear that many companies and those who invest in them, including pension funds, can reap substantial benefits from meeting market and consumer demands for greater transparency, greater democracy. Increasingly, people do want to know how their savings are being applied – it is wholly reasonable that they should do so, and our proposal will make it possible.4 Sparkes (2000b) appears to take a similar line interpreting the driving factors behind SRI pension regulation. He lists the following (which I have adapted slightly): ■
growth of ethical/green consumerism and public awareness;
4
Minister of State for Social Security. Speech to PIRC Corporate
Responsibility Conference.
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■
local authority desire to implement Local Agenda 21;
■
government frustration over slow progress on corporate governance;
■
the need for greater transparency and disclosure in financial services;
■
campaigns within pension funds for an SRI approach (e.g. ‘Ethics for USS’);
■
geo-political concerns over global capitalism. I have covered most of these points elsewhere. The last
mentions SRI in a global perspective. The ‘anti-capitalist’ riots in Seattle, Prague, London and Genoa cannot be ignored. It is not just extremists who feel that ‘unfettered’ markets contribute to global problems. Sparkes, 2000b puts it neatly: Socially responsible investment is one way of putting the genie of unregulated free market forces back into the ‘bottle’ of some kind of social constraint. Some commentators do not see that there is necessarily a conflict between SRI and market considerations – Mansley (2000) outlines SRI as part of a business plan and envisages SRI as part of company evaluation. SRI is well established in Canada and Australia and there are SRI pension funds in Switzerland and The .... 159 ....
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Netherlands. It seems possible that the EU might provide some incentives for SRI in a similar vein to the UK. For Sparkes (2000b), socially responsible investment = corporate social responsibility. The new legislation also requires pension funds to be responsible in their use of rights (such as voting rights) attached to investments. This could well result in management focusing on other matters besides wealth maximization alone. The UK government encourages saving through taxfree independent savings accounts (ISAs); might there be tax incentives to invest in socially responsible ways? There are always problems with ‘interventions’ like this. It might encourage ‘unscrupulous’ ethical funds; requiring a bureaucracy to police them. It could also mean that ethical shares would be falsely over-valued. There is an unease among financial service companies, financial advisers and investors themselves when financial matters and ‘politics’ embrace one another too closely (Lewis and Mackenzie, 2000a). In the focus groups discussed in Chapter 5, our ‘old-style’ ethical investors were not keen on ‘active engagement’, some saying that they considered this ‘too political’ preferring exclusions instead. These exclusions are not purely to salve consciences; investors believe their actions can do some good without active engagement: would there be any point, said one participant, in joining the Conservative Party in order to change
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it? These investors do not believe that negotiating with ‘bad’ companies will work. Unlike SRI pensions funds, old-style ethical investors are prepared, under some circumstances, to pay for their principles. It is not altogether a cynical interpretation to say that the SRIs are not ethical investments – pension funds are responding to the wishes of minorities, albeit sometimes well organized and vociferous minorities, and a change in public preferences. There are certainly different shades of SRI. At one extreme, a pension fund might appoint a specialist SRI fund manager backed by a team to engage directly with companies (which shows a great deal of commitment). Alternatively, they can hand it over to an ‘outside’ body like the Friends Ivory and Sime’s Responsible Engagement Overlay. Perhaps the weakest (and cheapest version) is the ‘tie breaker’ system where an SRI investment is chosen over another where all other performance and risk factors are equivalent (Mansley, 2000).
SRI and corporate social responsibility (CSR) SRI is part of the ‘big picture’ for the current UK Labour government. The appointment of a Minister for Corporate Social Responsibility was announced in March 2000 (Dr Kim Howells, superseded by Douglas Alexander in 2001). .... 161 ....
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In the first press release setting out the social responsibility agenda, CSR is couched as a ‘win–win’ situation (4 May 2000). It is stressed that a business case (my emphasis) is being made for CSR. Because it is a ‘business case’, it does not impose additional pressure on business, rather: CSR can improve business performance. Working closely with communities can help businesses to develop new skills, and exposes business to new ideas and new networks, which can ultimately lead to new marketing opportunities. Similarly, on the CSR Web page we read: Many companies have found real competitive advantages from being socially responsible, for example through improved staff motivation and reputation with customers. (www.lowpay.gov.uk/support/responsibility.htm) This rhetoric is reminiscent of the ethical and SRI marking literature as well as the supportive articles of financial journalists. The language and these ideas are growing in cogency and familiarity. As these notions gain ground, they have the potential to develop into implicit explanations, received wisdom and the first that come to mind. CSR has a broad agenda: businesses are asked to look at how to improve their social, environmental and local eco.... 162 ....
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nomic impact, how they affect society at large, human rights, social cohesion, fair trade and corruption. CSR is claimed to be of relevance to small and large businesses alike. The campaign has branches with catchy (and not so catchy) titles, such as: Corporate Community Investment (CCI), Ethical Trading Initiative (ETI), Business Partners for Development (BPD), Business in the Community (BITC), Business in the Environment (BiE) – surely ‘BITE’ would have been better. These initiatives appear to give great store to compiling league tables of excellence in social responsibility, awarding prizes and for getting as many companies as possible to sign up, e.g. BITC has a membership of 700 companies, including 70% of the FTSE 100. These are crucial first steps and companies can gain considerable publicity from being ‘top of the pops’. Shell Transport and Trading led the BITC league table of 184 environmentally responsible companies and other global businesses in 2001. Beyond the prize-giving and back-slapping one is bound to ask just how tangible the achievements have been. BiE has revealed that 33% of companies in the league table do not measure their global warming emissions at all (www.bitc.org.uk//). The Labour government’s second term of office (2001) saw the appointment of a new CSR minister, Douglas Alexander, with a public commitment not only to engage .... 163 ....
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the business community but for government departments to clean up their act as well. All these steps are to be applauded but one must remember that the appointment is currently only a part-time Minister of State post within the Department of Trade and Industry.
Types, multi-selves and the rest of it How ‘markets’ work is disputed. The relative simplicity of the efficient market hypothesis and its variants has its attractions, as a descriptive rather than an analytic perspective would, by necessity, be highly complex. The notion that there is more than one ‘type’ of economic actor has been introduced in various parts of the current text (e.g. Margolis, 1982; Elster, 1985). This obviously adds to the complexity but helps us because the narrative is more ‘realistic’. It is useful to put this within the context of the discipline of psychology and in particular the study of personality. The idea that there are different ‘types’ of people has not been fashionable in psychological circles for some time. Mainstream approaches (especially in the USA) are based on ‘trait’ theory. Instead of pointing at someone and saying that person is an ‘extrovert’ or an ‘introvert’, it is believed that individuals have a variety of traits, the strengths of which can be compared, statistically with other people. The number of these salient traits ranges from .... 164 ....
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three (Eysenck, 1982) at the bottom end to about 16 (Cattell, 1950). Eysenck did not have much time for the influence of culture, arguing that psychological traits were largely determined biologically. The way we are is seen differently by those who take a more ‘social’ approach. Goffman (1959) was keen on the metaphor of the theatre. We all have roles to play, scripts and stages on which to perform. We can put on varying faces; our performances can be convincing or purposely ambiguous. In this perspective it is the social context (the ‘stage’) which affects the parts we have to play. Some authors have gone further arguing that personality hardly comes into it at all: if we find ourselves at a funeral, for example, we all act more or less the same way regardless of our individual differences. The most relevant contemporary developments have been inter-disciplinary involving psychologists, philosophers, political scientists, economists and sociologists (e.g. Elster, 1985; Etzioni, 1988). Disquiet both about rationality and self-interest as the single motive for behaviour has led to the discussion of the ‘multiple-self ’. Here, self-interest is not dismissed entirely, it is just that other types of motives are allowed as well – concern for others, moral commitments and varying forms of altruism. One’s base ‘instincts’ might be to satisfy only oneself; our more moral selves take others into account, alongside a sense of duty
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and responsibility. Etzioni (1988) talks of an internal dialogue between the two. (It could also be envisaged in a similar way to the dynamic quarrels between id, ego and superego in Freudian theory, without so much sex and death.) Unlike biological interpretations, this novel approach underlines the importance of choice (self-knowledge) and the social-cultural environment. Having a choice means that you do not have to be narrowly self-interested – you can choose to make sacrifices. In this scheme of things we have some level of self-knowledge (meta-knowledge) which means we have awareness of our own weaknesses, weaknesses we give in to on occasion and on other occasions, not. We even know our weaknesses can get the better of us, and like Ulysses, tie ourselves to the mast so as not to be tempted by the sirens (Elster, 1984). No man is an island and we are strongly influenced by social, cultural and historical currents. Having a choice and being reflective are freedoms which we enjoy more now in privileged societies than ever before. Who we are, and how we see ourselves are a mirror to current thinking. That is why the concept of rational economic man cannot be considered in isolation either. Whatever the intentions of those who persist with the idea (and some do for noble reasons), the concept of REM is regularly depicted as a realistic description of ‘human nature’ rather than as a useful analytic assumption. This, among other things, has policy
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implications: if you think people are knaves then it is appropriate to treat them as such (Le Grand, 1997; Lewis, Mackenzie, Webley and Winnett, 1998). Knaves evade taxes whenever they get the opportunity and claim social security benefits inappropriately when they can get away with it. A world populated with knaves requires a large ‘police force’. In this atmosphere, encouraging voluntary compliance and honourable behaviour, indeed believing such things exist, is ‘pie in the sky’. It is the pure inevitability of a fair proportion of biological and economic interpretations which begs the question ‘why bother to be good?’ (unless it improves my gene pool and my utility). It can also legitimize ‘selfishness’ as an acceptable way to go about ‘one’s business’. The government is part of this social-cultural milieu. The political values and priorities of government influence us, our values in turn influence government. A plausible commentary on current political thinking is that the government wishes to promote a different kind of individual to REM, a ‘socially responsible person’ – socially responsible investing is part of this policy. In the past it has been speculated that a benevolent government that spends a large amount on social security encourages, through demonstration of its benevolence, charitable giving among citizens. The opposite effect is the ‘crowding-out’ effect where governments cancel out individual responsibility for
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social welfare (Jones, Cullis and Lewis, 1998). The ‘third way’ of stimulating social responsibility (and corporate social responsibility) in the private sector need not go hand in hand with a large public sector.
More about mixed motives and the ubiquitous ‘market’ Our ‘selfish’ selves and our ‘moral selves’ may come to the fore in different contexts. It has been speculated that our ‘moral’ selves can be encouraged if we see others behaving similarly – it becomes the norm to do so. In a selfish society, we expect everyone to be self-interested, and we feel no guilt about being self-interested ourselves. Rather than believing that self-interest can lead to the ‘good’ society, writers have pointed out that without trust and ‘good manners’ markets would soon break down (e.g. Granovetter, 1985). So, at the ‘macro’ level, the balance between our ‘moral’ and ‘selfish’ selves will be affected by what constitutes acceptable behaviour in a particular culture at a specific point in time. The ‘face’ that we show will also be determined by less global social situations: whether we are at a charity ball, being asked about famine relief, or at a party chatting and drinking with friends. Finally, there is room for individual differences in the moral/selfish cocktail. Robert Frank has shown that studying economics .... 168 ....
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socializes students into becoming more like REM (Frank et al., 1993). Fund managers and important players in financial markets may also be more like REM than other people, both because of who they are and their socialization echoed in their career choice.
Manipulation? If REM lives in the city, and those economic actors with a conscience are the ‘hicks’ from out of town, could the former successfully manipulate the latter? Before this question is addressed, a little has to be said about the relationship between cognitive and social psychology. In the ‘anomalies’ literature referred to in the previous chapter, it is now pretty well established that people do not make economic decisions in the way that REM would – people are driven by heuristics, rules of thumb and various ‘biases’. These are cognitive phenomena and may ultimately be related to how the brain works. ‘Values’, attitudes and moral commitments are different kinds of ‘stuff ’ – they are culturally situated and open to reflection and choice – but, as before (and in the current volume), have been shown to systematically influence economic decisions. In considering the work of Frey and Eichenberger (1994), we can lump these cognitive and social aspects together for the time being. .... 169 ....
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In their paper ‘Economic Incentives Transform Psychological Anomalies’, Frey and Eichenberger make the key points that given these anomalies exist there are incentives in the market to exploit them (our ‘city slickers’ perhaps) and incentives for conscience-driven ‘hicks’ not to be duped. (There are, of course, costs involved by both parties as well.) Taking this view, one can envisage a situation in which ethical and socially responsible investors would soon sit up should they sense any sign of exploitation. Similarly, it is possible that financiers will see it to their advantage to embody some of the preferences of their consumers – it would be more efficient to share them than to pay for expensive consumer research. The ‘hicks’ are not so naïve as to think financiers fully share their values and indeed would want them to have the financial acumen (and some of the ‘values’ associated with this acumen) that they themselves lack.
Behavioural finance and social psychology Schleifer (2000) neatly describes the efficient market hypothesis (hereafter EMH) as comprising three assumptions: (1) investors are rational; (2) some investors are not rational, their trades are random and cancel each other out, therefore not affecting prices; (3) rational arbitragers will eliminate any influences of irrational investors. .... 170 ....
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Schleifer (2000) recognizes EMH, at least up until the 1970s, as one of the great triumphs of twentieth-century economics. Changes in contemporary thinking and the recognition of the importance of research in cognitive psychology and decision making (e.g. Kahneman and Tversky, 1979) have irrevocably changed matters. These ‘biases’ or ‘anomalies’ have included ‘endowment effects’, personified in a reluctance to sell stocks that lose value; ‘framing effects’; and ‘representational heuristics’, where more recent financial data are given greater importance than they merit. De Bondt and Thaler (1985) have shown that ‘loser portfolios’ can be winners precisely because recent poor performance is given too much weight by (irrational) investors. Shiller’s (1989) thesis that stock market prices are far too volatile for the simple EMH hypothesis to work has also been highly influential. Returning to the trinity of arguments which manifest EMH, Schleifer believes that all three assumptions fall in the face of the evidence. Investors are not rational in the restricted sense, nor are they randomly irrational – instead people deviate from rationality in predictable ways. Arbitraging can be excessively risky, and often there are few if any suitable substitutes available. If this position holds sway, it may be that investments which fail to appear on ethical and socially responsible lists may prove poor substitutes for ‘cleaner’ ones. .... 171 ....
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■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■
What ‘real’ investors do, how they think, how their beliefs and values influence their decisions are topics at the core of behavioural finance. ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■
Just as heuristic ‘biases’ are non-random, so are shifts in values and moral sentiments. People have different values, of course; the contention here is that demand for moral characteristics in investment vehicles is a major change in values which will not easily be swamped by opposing value systems – especially, dare I say, in the longer term. Behavioural finance has been highly influenced by cognitive psychologists and decision theorists – it is now the turn of social psychologists to make an input. Beliefs and values are, after all, shared with others and we are influenced by others – they are a social not an individual phenomenon. The new Journal of Psychology and Financial Markets (2000) is committed to publish interdisciplinary work not only from economists and decision theorists, but from social psychologists and anthropologists as well. Social perceptions, consumer confidence and subjective expectations all matter as does the relationship between these factors to value systems and moral sentiments. The present volume has exposed a link between moral beliefs and perceived stock market performance and even that .... 172 ....
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changing values can influence how stock markets actually work. Finally, there is the language battle. Economists are excellent at modelling behaviour and not so hot at describing the processes which underlie it. That is why the talk has been of rational ‘anomalies’ – exceptions to the rules, persistent yet still peripheral exceptions that require tweaking of the REM model here and there. This book adds its voice instead to the call for a ‘behavioural analysis’ where the real life of the economic actor is at the core.
From this moment on The moving finger has written and has moved on. The analysis is historical and instantly out of date. What I am attempting here is a crude depiction of the processes observed with speculations about the future (see Figure 7.1.) At T1 there are four main explanatory categories. The ‘Activists’, some of whom, especially religious activists, are mentioned in Chapter 2. The 1980s saw major shifts in public preferences which were related to geophysical changes, environmental catastrophes and changes in the political climate. Enthusiasm for ‘free-market’ capitalism started to wane in the 1980s, especially in the UK and other parts of Europe. A return to ‘old-style’ socialism seemed unlikely too: a new ‘third way’ was being sought. .... 173 ....
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Financial agencies recognize opportunities
Activists
‘Meeting of minds’ between Activists & Financial agencies
Shifts in public preferences
Preference shift persist
Geophysical changes & environmental catastrophes
Problems persist. Raised public consciousness
Political climate
Policy initiatives
T1
T2
FIGURE 7.1
■
Dilution?
Legitimized ‘mainstream’ repackaging as ‘socially responsible investing’
New dawn?
Backlash?
T3
T4?
Past and future
At T2 the ‘Activists’ were able to persuade the big financial players that there was something in ethical investing. Preference shifts among ‘ordinary’ folk persisted and more secular concerns (including environmental concerns)
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added weight to the ‘movement’. The ‘green agenda’ came increasingly to the fore: public consciousness was raised to such a degree that people denying the existence of pressing environmental problems were themselves becoming the ‘outsiders’. Emerging policy initiatives favoured an increasing role for corporations to help solve society’s ills. The very early part of the twenty-first century has seen a coming together of these influences, repackaged and legitimized as ‘socially responsible’ investing. Three trajectories have been drawn for T4 – the future. One is ‘Dilution’. This pessimistic prediction suggests that the original dreams of the activists and protagonists become watered down and smooth – edged by acceptability. ‘Socially responsible investing’ will have little influence beyond its linguistic appeal. The second pessimistic trajectory is ‘backlash’. Bell-bottomed trousers and SRI can soon go out of fashion; a change in government could herald a withdrawal of SRI and CSR initiatives. One can imagine a return to something like the attitudes of the City of London in the 1980s where the ‘bleeding hearts’ will again be ridiculed as being out of step with ‘economic reality’. Let us end with a little optimism – perhaps there is a ‘new dawn’ where the contemporary rhetoric of politicians and socially responsible travellers will work its magic.
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Appendix
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Appendix
The Morals and Money Project Survey of Ethical Investors We would like to learn a little about your motives for investing, your attitudes, how you think your ethical and other unit funds perform and the quality and nature of the services they provide. All of this information is anonymous, neither the researchers nor your fund management company will be able to match your particular answers to your name. As independent researchers we value your responses whatever they are. When we receive your completed questionnaire we will send 50p to Cancer and Leukaemia in Childhood Trust (CLIC). Every questionnaire returned counts.
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(a) a much lower rate of financial return (b) a slightly lower rate of financial return (c) a similar rate of return (d) a slightly higher rate of return (e) a much higher rate of return
(a) much riskier than ordinary funds (b) a little riskier (c) about the same (d) a little less risky (e) a lot less risky
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1b Return In the long term, compared to ordinary investment funds, do you think ethical funds offer:
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1a Risk In your view, compared to ordinary investment funds, are ethical funds:
1. Many people invest both in ethical unit trusts and non-ethical ones. Whether or not you personally do this, we would like to hear your views about how these two different types of unit trust compare. Please tick the appropriate boxes for each question.
Appendix Page 178
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.... 178 ....
.... 179 .... Total should add up to about:
(e) Other (please specify)
(d) Bank, building society and Tessa accounts
(c) Ethical unit trusts, investment trusts, PEPs
(b) Ordinary unit trust, investment trusts, PEPs
(a) Direct shareholdings
100%
Proportion of your portfolio
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Kind of investment
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(a) Thinking about all your investments excluding pensions and life insurance funds, approximately what proportion fall into the following categories:
2. Your investment and savings
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Leave things as they are
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Reduce my ethical investment (EI) substantially
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(c) Now imagine the best ethical fund achieves only a 5% average annual return, whereas a typical ordinary unit trust produces a 10% annual return. Which of the following would you do?
Reduce EI a little
27/2/02
Reduce my ethical investment (EI) substantially
(b) Imagine that over the next five years the best ethical fund only produced on 8% average annual financial return, whereas a typical ordinary unit trust produced a 10% average annual return. Assume everything else remains the same. Which of the following would you do? (Tick one box)
Appendix Page 180
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Reduce EI a little
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Reduce my ethical investment (EI) substantially
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(d) Now imagine that an average ethical fund achieves a 12% average annual return, whereas a typical ordinary unit trust produces only a 10% annual return. Which of the following would you do?
Appendix Page 181
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Strongly applicable
(a) are there to provide me with an income ■ ■ ■ ■ ■ (b) are mainly for capital growth ■ ■ ■ ■ ■ (c) are there so I can leave money to my children ■ ■ ■ ■ ■ (d) are there to provide for my older age ■ ■ ■ ■ ■ (e) are there for security and stability ■ ■ ■ ■ ■ (f) are there for my financial independence ■ ■ ■ ■ ■ (g) are there for speculative purposes ■ ■ ■ ■ ■ (h) are there to satisfy a desire to accumulate ■ ■ ■ ■ ■ (i) other (please specify) .........................................................................................................
Not Fairly In Fairly applicable inapplicable between applicable
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My non-ethical investments:
People have many different kinds of motives for investing. Thinking only of your non-ethical stock market or unit trust investments, to what extent would the following apply to you?
27/2/02
3. Financial reasons for non-ethical investment
Appendix Page 182
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Fairly applicable
Strongly applicable
(a) are there to provide me with an income ■ ■ ■ ■ ■ (b) are mainly for capital growth ■ ■ ■ ■ ■ (c) are there so I can leave money to my children ■ ■ ■ ■ ■ (d) are there to provide for my older age ■ ■ ■ ■ ■ (e) are there for security and stability ■ ■ ■ ■ ■ (f) are there for my financial independence ■ ■ ■ ■ ■ (g) are there for speculative purposes ■ ■ ■ ■ ■ (h) are there to satisfy a desire to accumulate ■ ■ ■ ■ ■ (i) other (please specify) ........................................................................................................
Not Fairly In applicable inapplicable between
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My ethical investments:
People have many different motives for investing in ethical funds. This time, thinking only of your ethical investments, to what extent would the following apply to you:
27/2/02
4. Financial reasons for ethical investment
Appendix Page 183
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.... 184 ....
(c) house sale (d) unexpected windfalls (e) redundancy money (f) spare money (g) other (please specify) ....................... Total should add up to:
(c) house sale (d) unexpected windfalls (e) redundancy money (f) spare money (g) other (please specify).......................... Total should add up to:
100%
(b) inheritance and legacies
(b) inheritance and legacies
100%
(a) funds saved during my lifetime
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(a) funds saved during my lifetime
(5b) My ethical investments consist of (please put approximate proportions):
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(5a) My non-ethical stock market or unit trust investments consist of (please put approximate proportions):
5. Sources of investment
Appendix Page 184
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(e) other (please specify) ...............................................................................................................
(d) I want my investments to be ethically clean
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(b) I want my investments to help those companies which are making a positive contribution to society (c) I want my money to be used to campaign for companies to change
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(a) I want to avoid investing in companies which are doing harm
Disagree strongly
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My ethical investments:
People can also have ethical motives for investing ethically. Which of these apply to you:
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6. Motives for ethical investment
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(a) I am concerned about the bad things companies do, but I haven’t worked out a definite moral position on most of the issues (b) I have worked out definite moral positions about the bad things companies do (c) I expect my ethical fund to have established definite moral positions about the bad things companies do (d) I expect my ethical fund to offer a set of ethical investment criteria and not get involved in taking moral positions
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Disagree strongly
7. Please say to what extent you agree or disagree with the following statements:
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.... 187 .... (b) offer advice to companies to show them how to improve
(a) only provide an ethically screened fund (i.e. avoiding bad companies, and supporting good ones) and take no other action
I would like an ethical fund to:
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Neither
(c)
Disagree strongly
A fund that concentrates on actively lobbying to change corporate practice for the better, and invests in companies that are failing in order to try to reform them.
(b)
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9. Role of funds
A fund that concentrates on avoiding companies that are failing ethically, but has little impact on changing corporate practice for the better.
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(a)
8. If you had to choose between the following two kinds of ethical fund, which would you choose?
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.... 188 ....
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(e) contribute actively to debate about corporate ethics to the development of public policy (f) work with other investors to promote higher standards of corporate ethics
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(d) campaign publicly for companies to adopt better policies
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(g) other (please specify)
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(c) quietly lobby companies in a concerted way to adopt better policies
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.... 189 ....
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(d) Ethical investments might not perform as well as non-ethical funds (e) I inherited my non-ethical funds (f) I inherited my non-ethical funds before I knew about ethical investment
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(c) There is insufficient international spread in ethical funds
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(b) It is too risky to put all my money in ethical funds
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(a) There is insufficient choice of ethical funds to meet all my investment needs
Disagree strongly
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Many investors own ethical and non-ethical investments. If you are such an investor, please say to what extent the following reasons for holding non-ethical investments apply to you:
10. Ethical and non-ethical investments
Appendix Page 189
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.... 190 .... (k) Other (please specify)
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(i) It is not important that all my money is invested ethically, only that some of it is (j) I chose my ethical investments only because of their good financial performance
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(g) I plan to sell my non-ethical investments, but I haven’t got round to it yet (h) It is too expensive to change my existing non-ethical investments to ethical ones
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(a) Funds should publish their ethical investment policy in more detail than at present (b) Funds should set out clearly their thinking on each of the various ethical issues (c) Investors should appoint the members of the advisory committee/committee of reference
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Disagree strongly
The following statements are about how ethical funds are managed. Please indicate the extent to which you agree or disagree with them.
27/2/02
11. Practice of ethical investment
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(e) The funds should be more publicly outspoken on the ethical positions they take (f) The advisory committee/committee of reference should offer unit holders the chance to vote on its ethical positions
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(g) Other (please specify) .....................................................................................................
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(d) The manager’s report should contain a detailed report of the ethical activities of the fund as well as financial ones
Appendix Page 192
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Hold onto the shares for a reasonable period until it can sell them for the best price Stick with the company in order to persuade it to change (until such time as it realizes this is hopeless) Other (please specify) ..........................................................................................
(b) (c)
(d)
Sell its investments immediately, stating publicly why it is doing so, even if this strategy affects the fund’s financial performance
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(a)
If an ethical fund discovers that a company that it invests in is acting unethically, should it: (Please choose one of the following)
27/2/02
12. Response to an unethical company
Appendix Page 193
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.... 193 ....
.... 194 ....
RSPB WDM Church of England Society of Friends (Quaker)
WWF Oxfam Amnesty International Methodist Church
(b) Which daily newspaper do you read most often?
Greenpeace
Political party (Please specify)
Catholic Church
Shared Interest
BUAV
Friends of the Earth
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National Trust
To which of the following organizations do you belong (please tick any that apply to you):
(a) Memberships
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13. About You
Appendix Page 194
APPENDIX
.... 195 .... Female ■
35–44
45–54
55–64
65+
(e) Occupation Please state your occupation (if you are retired, please state your previous occupation).
Male ■
(d) Your sex
25–34
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Under 25
Please tick one box:
27/2/02
(c) Your age
Appendix Page 195
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(2) There should be more restrictions on the production and sale of pornographic magazines (3) Nuclear power is a good alternative to the use of limited fossil fuels (4) For sufficient money I would do almost anything
.... 196 .... (5) Car usage in Britain has to be reduced (6) There is no need to worry about the extent of gambling in Britain today
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(1) Smoking in public places should be forbidden
Disagree slightly
27/2/02
Disagree strongly
Please read the following statements carefully and say how much you agree or disagree with them by marking the relevant box. Make sure that you do not miss any question.
14. Opinions
Appendix Page 196
APPENDIX
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(7) The degradation of the ozone layer is a very serious problem (8) We should do more to help the Third World (9) The production and sale of armaments should, in the interests of world peace, be much more vigorously controlled (10) We should stop using animals to test cosmetic products (11) Manufacturers and retailers of alcoholic drinks take advantage of people’s weaknesses (12) If a significant number of people stopped investing in companies which harm the world and its people then those companies would soon change their policies for the better
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(14) It is in the long-term interests of profitability and welfare not to hamper business people with moral and ethical concerns (15) When it comes down to it, most people will carry on investing in companies which give them the best return on their money regardless of how the profit is generated (providing it is legal)
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27/2/02
(13) It is necessary to use animals for testing pharmaceuticals with the potential of alleviating human pain and suffering
Disagree strongly
Appendix Page 198
APPENDIX
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Thank you for completing this questionnaire, please put it in the FREEPOST envelope provided. Remember we will donate 50p to CLIC for each completed questionnaire we receive. Craig Mackenzie, Social Sciences, FREEPOST The University of Bath, Bath BA1 5TZ
27/2/02
15. Please list the different ethical investments you have.
Appendix Page 199
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References
Ajzen, I. and Fishbein, M. (1980) Understanding Attitudes and Predicting Social Behaviour. NJ: Prentice-Hall. Anderson, D. (1996) What Has Ethical Investment to Do with Ethics? London: The Social Affairs Unit, Research Report 21. Andreoni, J. (1988) ‘Privately Provided Goods in a Large Economy: The Limits of Altruism’, Journal of Public Economics, 35, 57–73. Becker, G.S. (1975) Human Capital. New York: National Bureau of Economic Research. Bowie, N. (1994) ‘Economics and the Enlightenment: Then and Now’ in Lewis, A. and Warneryd, K–E (eds) Ethics and Economic Affairs. New York and London: Routledge. Bowles, S. (1998) ‘Endogenous Preferences’, Journal of Economic Literature, vol. XXXVI, 89–111.
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Brennan, G. (1973) ‘Pareto Optimal Redistribution: The Case of Malice and Envy’, Journal of Public Economics, vol. 2, 173–84. Brennan, G. and Lomasky, L. (1993) Democracy and Decision: The Pure Theory of Electoral Preference. Cambridge: Cambridge University Press. Buchanan, J.M. (1968) Demand and Supply of Public Goods Chicago: Rand McNally.
Buchanan, J.M. and Tullock, G. (1965) The Calculus of Consent. Ann Arbor: University of Michigan Press. Cattell, R.B. (1950) Personality. New York: McGraw-Hill. Chirinko, R.S. (1990) ‘Altruism and the Role of Social Capital in the Private Provision of Public Goods’, Economics and Politics, vol. 2, 275–90. Coase, R.H. (1960) ‘The Problem of Social Cost’, Journal of Law and Economics, 3, 1–44. Collard, D. (1978) Altruism and Economy. Oxford: Martin Robertson. Cullis, J. and Jones, P. (1998) Public Finance and Public Choice. 2nd edn. Oxford: Oxford University Press. Cullis, J., Lewis, A. and Winnett, A. (1992) ‘Paying to be good? UK ethical investments’, Kyklos, 45(1), 3–24. Cullis, J.G. and Jones, P.R. (1987) Microeconomics and the Public Economy: A Defence of Leviathan. Oxford: Blackwell.
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Hirsch, F. (1976) The Social Limits to Growth. Cambridge, MA: Harvard University Press. Hirschman, A. (1970) Exit, Voice and Loyalty. Cambridge, MA: Harvard University Press. Hirshleifer, J. and Riley, J.G. (1992) The Analytics of Uncertainty and Information. Cambridge: Cambridge University Press. Hochman, J.M. and Rogers, J.D. (1969) ‘Pareto Optimal Redistribution’, American Economic Review, vol. 59, 542–57. Hollis, M. and Nell, E.J. (1975) Rational Economic Man. Cambridge: Cambridge University Press. Jones, B. (1996) ‘The Social Constitution of Markets’ in Crompton, D., Gallie, D. and Purcell, K. (eds) Changing Forms of Employment. London: Routledge. Jones, P.R., Cullis, J.G. and Lewis, A. (1998) ‘Public Versus Private Provision of Altruism: Can Fiscal Policy Make Individuals “Better’ People?”, Kyklos, 51, 3–24. Kahneman, D. and Tversky, A. (1979) ‘Prospect Theory: An Analysis of Decision Under Risk’, Econometrica, 47, 263–91. Keating, B. (1981) ‘United Way Contributions: Anomalous Philanthropy’, Quarterly Review of Economics and Business, 21, 114–19. Kelman, M. (1988) ‘On Democracy Bashing’, Virginia Law Review, vol. 47, 199–227.
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Keynes, J.M. (1936) The General Theory of Employment Interest and Money. London: Macmillan. Knight, R. and Petty, D. (1995) The Impact of Catastrophes on Shareholder Value. Oxford: Templeton College. Knox, T.M. (1952) Hegel’s Philosophy of Right: Translated with Notes. Oxford: Oxford University Press. Kuran, T. (1990) ‘Private and Public Preferences’, Economics and Philosophy, vol. 6, 1–26. Lancaster, K.T. (1966) ‘A New Approach to Consumer Theory’, Journal of Political Economy, 74, 132–57. Le Grand, J. (1997) ‘Knights, Knaves or Pawns? Human Behaviour and Social Policy’, Journal of Social Policy, 26(2), 149–69. Ledyard, J.O. (1995) ‘Public Goods: A Survey of Experimental Research’ in Kragel, J.H. and Roth, A.E. (eds) The Handbook of Experimental Economics. Princeton: Princeton University Press. Lewis, A. (2001) ‘A Focus Group Study of the Motivation to Invest: “Ethical/Green” and “Ordinary” Investors Compared’, Journal of Socio-Economics, 30, 331–41. Lewis, A. and Cullis, J. (1990) ‘Ethical Investments: Preferences and Morality’, Journal of Behavioural Economics, 19, 395–411. Lewis, A. and Mackenzie, C. (2000a) ‘Support for Investor Activism Among UK Ethical Investors’, Journal of Business Ethics. 24, 215–22. .... 206 ....
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Lewis, A. and Mackenzie, C. (2000b) ‘Morals, Money, Ethical Investing and Economic Psychology’, Human Relations, 53(2), 179–91. Lewis, A. and Mackenzie, C. (2000c), ‘Green and Ethical Investing: Can It Make a Difference?’ in Warhurst, A. (ed.) Towards a Collaborative Environment Research Agenda. New York: St. Martin’s Press. Lewis, A. and Webley, P. (1994) ‘Social and Ethical Investing: Preferences and the Willingness to Sacrifice Financial Return’ in Lewis, A. and Warneryd, K–E. (eds) Ethics and Economic Affairs. London and New York: Routledge. Lewis, A., Webley, P. and Furnham, A. (1995) The New Economic Mind: The Social Psychology of Economic Behaviour. Hemel Hempstead, UK: Harvester Wheatsheaf. Lewis, A., Mackenzie, C., Webley, P. and Winnett, A. (1998) ‘Morals and Markets: Some Theoretical and Policy Implications of Ethical Investing’ in Taylor-Gooby, P. (ed.) Choice and Public Policy. New York: St. Martin’s Press. Mackenzie, C. (1997) Ethical Investment and the Challenge of Corporate Reform. Unpublished PhD thesis. University of Bath. Mackenzie, C. (2000) ‘An Evolutionary Model’, Pensions Week, March supplement. Mackenzie, C. and Lewis, A. (1999) ‘Morals and Markets: The Case of Ethical Investing’, Business Ethics Quarterly, 9(3), 439–52. .... 207 ....
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Malkiel, B. (1985) A Random Walk Down Wall Street. New York: Norton. Mansley, M. (2000) ‘Meeting the Challenge’, Pensions Week, March supplement. Mansley, M. (2001) Socially Responsible Investment. Sudbury, Suffolk: Monitor Press. Margolis, H. (1982) Selfishness, Altruism and Rationality. Cambridge: Cambridge University Press. Marr, W. and Raj, B. (1983) How Economists Explain. Lanham: University Press of America. Michelman, F.I. (1967) ‘Property, Utility and Fairness: Comment on the Ethical Foundations of “Just Compensation” Laws’, Harvard Law Review, vol. 80, 1165–258. Olson, M., Jr. (1965) The Logic of Collective Action. Cambridge, MA: Harvard University Press. Roback. J. (1989) ‘Racism as Rent Seeking’, Economic Inquiry, vol. 27, 661–81. Shapiro, I.S. (1984) America’s Third Revolution: Public Interest and the Private Role. New York: Harper & Row. Shiller, R.J. (1990) Market Volatility. Cambridge, MA: MIT Press. Shleifer, A. (2000) Inefficient Markets: An Introduction to Behavioural Finance. Oxford: Oxford University Press. Smith, A. (1776/1937) An Inquiry into the Nature and .... 208 ....
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Causes of the Wealth of Nations. New York: The Modern Library. Solow, R. (1987) Comments on ‘How Much (or Little) Life Cycle Is There in Micro Data? The Cases of the United States and Japan’, pp. 224–8 in Dornbusch, R., Fischer, S. and Bossons, J. Macroeconomics and Finance. Cambridge, MA: MIT Press. Sparkes, R. (2000a) ‘Socially Responsible Investment Comes of Age’, Professional Investor, June. Sparkes, R. (2000b) ‘A Business Outlook on SRI’, Portfolio Management, April. Stigler, G. and Becker, G. (1977) ‘De Gustibus Non Est Disputandum’, American Economic Review, vol. 67, 76–90. Stigler, J.G. (1975) The Citizen and the State: Essays on Regulation. Chicago: University of Chicago Press. Taylor, P.M. (1992) War and Media: Propaganda and Persuasion in the Gulf War. Manchester: Manchester University Press. Thaler, R. (1993) Advances in Behavioural Finance. New York: Russell Sage. Thaler, R.H. (1994) Quasi Rational Economics. New York: Russell Sage Foundation. Titmuss, R. (1971) The Gift Relationship. New York: Pantheon. Tomer, J.F. (1994) ‘Social Responsibility in the Human Firm’ in Lewis, A. and Warneryd, K–E. (eds) Ethics and Economic
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Affairs. New York and London: Routledge. Ware, A. (1990) ‘Meeting Need Through Voluntary Action: Does Market Society Corrode Altruism?’, pp. 185–207 in Ware, A. and Goodin, R.E. (eds) Needs and Welfare. London: Sage. Webley, P. and Lewis, A. (1994) ‘Social and Ethical Investing: Beliefs, Preferences and the Willingness to Sacrifice Financial Return’ in Lewis, A. and Warneryd, K–E. (eds) Ethics and Economic Affairs. New York and London: Routledge. Webley, P., Lewis, A. and Mackenzie, C. (2001) ‘Commitment Among Ethical Investors: An Experimental Approach’, Journal of Economic Psychology, 22, 27–43. Winnett, A. and Lewis, A. (1995) ‘Household Accounts, Mental Accounts and Savings Behaviour: Some Old Economics Rediscovered?’, Journal of Economic Psychology, vol. 16, 431–48. Winnett, A. and Lewis, A. (2000) ‘ “You’d Have to Be Green to Invest in This”: Popular Economic Models, Financial Journalism and Ethical Investment’, Journal of Economic Psychology, 21, 319–39. Wittman, D.A. (1995) The Myth of Democratic Failure: Why Political Institutions are Efficient. Chicago and London: University of Chicago Press. Woodward, T. (2000) The Profile of Individual Ethical Investors and Their Choice of Investment Criteria. Bournemouth: Bournemouth University Press. .... 210 ....
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Abbey Life Ethical Trust 20, 31–2, 33, 34, 36, 38 active engagement 18, 49, 98–101, 123, 145–6, 150–1, 153–5 effects/responses to 25, 135 individual investors’ views on 25, 98–101, 123, 160–1 activists 142, 148, 153, 159, 173–5 age, attitudes/values and 59 Agenda 21 implementation 159 alcohol 40, 59 Allais Paradox 126 altruism 9, 86, 103, 115, 116, 117–21, 128, 165–6 animal-related issues 26–7, 32–3, 59, 73, 87 anomalies 116, 117, 124, 169–70, 171, 173 anti-capitalist activism 159 apathy see inertia arbitraging 171 armaments 59, 73, 87, 151 attitudes and behaviour 68, 114–15 to money from different sources 65, 89, 121–2 see also commitment, inertia and under investors Australia 159 avoidance criteria see under ethical criteria banks/banking 23, 62, 84 Barchester Best of Green 33 behaviour, attitudes and 68, 114–15 beliefs 24–5, 172 see also attitudes and religion bequeathal, as motivation/influence on behaviour 89, 93, 102, 121 boycotting 153 see also ethical criteria, avoidance-based
brand assets 142–3 British Aerospace 150 British American Tobacco 89, 150 British Petroleum 150 British Telecom 150 business performance CSR and 162 see also rates of return business practices 87, 96–7, 134, 146–7, 154 see also Corporate Social Responsibility campaigning see active engagement and political involvement Canada 159 capitalism, attitudes to 94, 159, 173–5 see also investment, resistance to CERES (Coalition of Environmentally Responsible Economies) 154, 155 change 151–2, 154, 173–5 see also inertia and under ethical criteria characteristics approach to consumer analysis 108–13, 136 charitable giving 57–8, 84, 86, 118 Chicago school 7–8, 134–5 children, leaving money to see bequeathal choice see decision making Christianity see religion churches 16, 17–18, 57 cigarettes see tobacco CIS see Co-operative Insurance Society Clerical Medical Evergreen 31–2, 33, 35, 39–40, 43 Close Fund Management 149 Coalition of Environmentally Responsible Economies (CERES) 154, 155 commitment 63–4, 69, 73, 75, 79, 85–6
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compliance costs 155 compromise see pragmatism computer simulations 68–9, 75–9 conscience-salving 50, 85, 101, 121 consultants activists as 148 see also IFAs consumer analysis, characteristics approach 108–13, 136 consumer preferences 142 see also preferences contradictions see anomalies and ethical contradictions control 86 see also power and predictability Co-operative Bank 23, 31–2, 37 Co-operative Insurance Society 33, 149 corporate practice see business practices Corporate Social Responsibility, UK government and 161–4 Credit Suisse 20 criteria, ethical see ethical criteria CSR see Corporate Social Responsibility cultural change see change cynicism see scepticism decision making 116–17, 121–2, 124–5, 126, 169, 171 and mental accounting 65, 89, 121–2 demand 17, 18, 27–8 see also elasticity/inelasticity democracy, markets and 7 dependence 86 diversification, risk and 48 Eagle Star Environmental Opportunities Trust 33 Ecological Building Society 23, 62 economic psychology see under psychology economics/economic theory 5–9, 51, 113–15, 134–5 effects of studying 168–9 empirical research and 115–17, 123, 124–8 journalism and 51–2 and preferences 67–8, 108–28 Ecumenical Development Co-operative Society 83 efficient market hypothesis 170–1 egoism see self-interest and selfishness EIRIS (Ethical Investment Research and Information Service) 4, 17–18, 21, 86–7 ethical unit trusts and 22, 37–8 Friends Provident and 20 FTSE International and 149 interviews with subscribers 86–90 survey sponsored by 150 elasticity/inelasticity 63–4, 75, 78–9, 102, 118, 127 EMH (efficient market hypothesis) 170–1 environmental issues 40, 59, 73, 87, 158–9 CERES Principles 154, 155 CSR and 163 marketing and 32–3, 40, 147–8
markets and 134–5, 146–7 remediation costs 146–7 ethical banking 23, 62, 84 ethical contradictions 89, 103 see also morally-mixed portfolios and pragmatism ethical criteria authenticity questions 46, 151, 155, 160 avoidance-based 4, 32, 33, 40, 98, 99, 100–1, 152–4 changes over time 45–6, 144–9, 151 individual investors’ 24, 59, 87, 98–101, 152–3, 160–1 positive 32–3, 40, 45 see also active engagement and ethics ethical financial products 3, 21–45–6 assets 3, 4–5 government incentives and 160 numbers 3 see also ethical unit trusts ethical IFAs 23–4 ethical investment claims of success 34–7, 41–2, 48–9, 135, 147 consumer demand and 17, 27–8 effects and possible effects 24–5, 49–51, 78, 96–101, 151–5 extent 3, 4–5, 143 investor typology and 129–30 legislation and 143, 157–9, 160 marketing see marketing motivation for see under investors as part of morally-mixed portfolios see morally-mixed portfolios repackaging 144–9 terminology for 4, 144 see also ethical financial products Ethical Investment Research and Information Service see EIRIS ethical investors see investors ethical unit trusts decision-making criteria 22 investors’ views on timing of selling shares 100–1 marketing material 31–43, 101, 135, 162 ethics 85–6 omplexity 26–7, 86 employees and 147 market/non-market environments and 127 see also ethical criteria and moral responsibility European Union 160 EUTs see ethical unit trusts Exxon Valdez 146–7, 154 fair prices 125 fashion ethics and 27, 118, 147 in investing 133–4, 136–7 financial journalism see journalism focus groups 25–6, 83, 90–8, 127, 135, 152, 160 Foreign & Colonial Investment Trust 89
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foresight, as motivation for investment 91, 92–3 free riding 123 Friends see Quakers Friends, Ivory and Sime 145–6, 161 Friends Provident 3, 15, 19 Committee of Reference 20–2, 26 Stewardship Fund 3, 15, 16–17, 18–20, 21, 61–2; marketing material 31–3, 34, 35–6, 37, 38, 40–3 FTSE International 149 FTSE4Good 149, 155 fungibility 122 gambling 40, 59, 95 gender issues 58, 59 General Motors 154 government intervention 7, 8, 137, 143, 149, 156–60 and individual responsibility 167–8 see also Corporate Social Responsibility green issues see environmental issues guilt 95 see also conscience-salving Henderson Ethical Fund 31–2, 34–5, 36 Holden Meehan 24 homo economicus/homo realitus 113–28, 134, 136 and the stock market 128–34 see also rational economic man ICCR 154–5 IFAs (independent financial advisors) 23–4 image 142–3 independence as ideal for others 85–6 as motivation for investment 91, 92–3 individual actions, views of effects 50–1 individuals economic theory and views of 113–28, 136 and interdependence 119–20 see also investors and under ethical criteria inertia 64, 89, 95, 102 inherited money 89, 121 interdependence 119–20 see also public goods Interfaith Center on Corporate Responsibility (USA) 154–5 interventionism 7, 8 interviews 83, 84–5, 86–7, 90 investment computer simulations concerning 68–9, 75–9 concerns in 3–4, 5–9 resistance to 17, 85, 94–5, 127 see also ethical investment and investors investments costs of changing 64, 100–1, 171 performance/returns on see rates of return see also morally-mixed portfolios investors characteristics and attitudes 56–79, 85–6, 87–103, 119, 127
and charities 57–8, 85–6 employment 57, 78 motivations for ethical investment 78, 85, 91–2, 101, 103, 118–19, 137 motivations for investment 91–3, 102–3 political involvement 57, 58, 78 resistance to changing investments 64, 89, 95, 102, 127 typologies of 129–30, 133–4, 136 see also ethical criteria, individual investors’ ISAs (independent savings accounts) 160 journalism 43–5, 46–52, 118, 144 Jupiter Ecology Fund 20, 21, 31–2, 50 Jupiter Environment Research 38 Jupiter International Green Investment Trust 33 Labour government, UK 143, 157–8, 161–4 legislation see government intervention legitimacy costs 157 lobbying see active engagement Local Agenda 21 implementation 159 loyalty see commitment marketing 18, 28, 51 see also publicity and under ethical unit trusts markets 7–8, 51–2, 156, 164, 170–1 and ethics 85–6, 127, 134–5, 156, 159 power and 141–2 see also stock market mental accounting 65, 89, 121–2, 125, 128 Mercury Provident 62 meta-preferences 103 money, sources of, and attitudes to investing 65, 89, 121–2 moral commitment see commitment moral responsibility 89, 93, 102, 103, 157, 165–9 see also ethics morally-mixed portfolios 60–1, 63–7, 73–4, 77–9, 86, 87–9, 95–6, 102–3 mortgages 23 motivation 85, 102–3, 117–21, 126–8 multiplicity 125 social 118, 119 see also homo economicus/homo realitus and under investors multiple self 103, 125, 165–6 see also ethical contradictions neo-classical economics 5–9, 113–15 see also homo economicus Netherlands, The 159–60 newspapers see journalism NOP 150 Nottingham County Council 150 NPI 22 Global Care Fund 31–2, 35, 36, 39–40, 49 nuclear issues 59, 73
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oil companies 50 opinion polls 150 paradoxes 126 pension funds 61–2, 65, 143–4, 149–50, 157–61 legislation concerning 143, 157–9, 160 performance of investments see rates of return Polaroid 154 policing 167 political involvement 57, 58, 78, 92, 98–9, 142 pollution see environmental issues pornography 59 Post Office 149 power 141–2 see also control pragmatism 22, 26, 60, 89–90, 95–6, 103 see also ethical contradictions and morallymixed portfolios precaution, as motivation for investment 91, 92–3 predictability 48, 50–1, 61, 128, 135 predictions 175 preferences 67–8, 103, 142 economic theory and 67–8, 108–28 paradoxes concerning 126 and willingness to pay 126 see also attitudes press see journalism prices, fairness 125 prudence 95–6, 102 see also pragmatism psychology 48, 51, 52, 116–17, 164–73 economic 6–7, 9, 48, 52, 116–17 see also rationality public goods 122–3 see also interdependence public opinion 7, 142, 150, 158 publicity 25, 43, 49 see also marketing Quakers 16, 18, 19, 40, 57 questionnaire survey 55–61, 62–7, 69–75, 99–101, 127 text 177–99 questionnaires 90 randomness, attitudes concerning 48 rates of return 61–2, 84 attitudes and beliefs concerning 62–5, 73–5, 77–9, 86, 94, 102, 115 reporting of 34–7, 41–2, 46–9 stock market theory 132, 133 rational choice theory 5 rational economic man 5, 8–9, 136, 166–70, 173 rationality/rational behaviour 114–15, 119, 170–1 and altruism 117–23 see also homo economicus realism see pragmatism
religion 15–18, 19, 24, 40, 46, 57, 85 marketing material and 43 REM see rational economic man responsibility see moral responsibility Responsible Engagement Overlay 145–6, 161 retirement provision 89, 92–3 see also pension funds returns see rates of return risk 48, 61–2, 65 Sainsbury’s 150 scepticism 20, 25–6 Scottish Equitable Ethical Trust 31–2, 34, 38–9 self-esteem 120–1 see also conscience-salving self-interest 114–15, 165–6, 168 selfishness 103, 167, 168 Shared Interest 23, 62, 83–4 investors in 83, 84–6, 88 shareholder advocacy see active engagement shares see investments Shell 88, 163 SI see Shared Interest SIF see Social Investment Forum Skandia Ethical Managed Funds 31–2, 33, 35, 38 smoking see tobacco Social Investment Forum 4–5, 38, 153 social motivation 118, 119 socialization 168–9 SRI (socially responsible investing) 4, 144–5, 159–61 tie breaker system 161 see also ethical investment stakeholder pensions 149–50 stock market theories of working of 130–4, 136–7 and wider markets 135, 136–7 Sun Oil 154 surveys 55 see also questionnaire survey Switzerland 159 telephone interviews 83, 84–5, 86–7, 90 Third World issues 59, 73, 84, 85 tobacco 27, 40, 151, 153 Traidcraft 83 trait theory 164–5 Triodos Bank 23 TSB Environmental Investor Fund 33 UK government 143, 157–8, 161–4 USA 4–5, 123, 154–5 USS (Universities Superannuation Scheme) 150–1, 159 Valdez Principles 154 values see beliefs Virginia school 7 voluntary work 118 weapons see armaments windfalls, attitudes to investing 65
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