Ethical Funds

The morning I began writing this article, I was at a familiar haunt dressing two grande mild coffees. Touch of cream, milk, and one sugar. A nearby brochure caught my eye. Entitled “Starbucks commitment to social responsibility,” it set out the guiding principles this megacorp now supports.

Making investments that benefit coffee producers, helping protect the environment, and creating a great place for employees to work, these ethical decisions are all company policy for Starbucks. One of the largest and most successful retail outlets in the world has woven moral principles into the fabric of their business. Judging from the line-up of people waiting for coffee, it’s working.

North America’s foremost business philosopher Jim Rohn once said: “The difference between greed and legitimate ambition is that greed is at the expense of others. Legitimate ambition is at the service of others.” This philosophy may be gaining favour in the investment world.

Premium Performance

For years ethical funds have been criticized for subpar returns when measured up to peer comparisons in the market. For many of us, ethical funds fall well below the radar. A phone call to Tony De Thomasis, my investment advisor, revealed that in his firm, DeThomas Financial, likely fewer than 5 percent of investors currently consider ethical funds as part of their portfolio.

But times are changing and ethical funds are beginning to compete on the global market. Recently, the Parnassus Fund, one of the largest ethical funds, reported an eye-opening, five-year return of 21.5 percent.

According to Peter Kinder, president of Boston-based KLD Research and Analytics and creator of the Domini 400 Social Index to measure performance of socially screened stocks, “It hasn’t hurt investors to stay out of tobacco stocks or to load up on companies with good environmental or labour records. Just the opposite. Good business practices make good companies, not the other way around.”

More Than Marketing

Cynics say that too many companies use the ethics tag merely as a marketing ploy. While some companies that are not truly committed to the principles of ethics may be looking for an edge in the market, ignoring ethical funds for this reason is a bit like not donating to charity because some organizations have excessive administration fees.

From personal experience lecturing at many Fortune 500 companies, I have seen a definite shift toward corporate responsibility. The bankruptcy of the Enron and WorldCom corporations in the US, and AdScam, the sponsorship scandal in Canada, have uncovered corruption in business, leading the savvy investor to keep his wallet under closer surveillance.

Character and Community

A local initiative called the York Region Character Community Council (charactercommunity.com) began five years ago with the specific intent of bringing character and ethics into the corporate and educational sectors. More than 75 businesses throughout York Region have pledged to operate with Character. In June 2006, the program proved even more successful when the Ontario Legislative Assembly unanimously resolved to adopt the Character initiative province-wide.

In the end, the success or failure of ethical funds will come down to consumer demand. Should we support them? The truth is that we reward good behaviour all the time. If our children do well, we give them our praise or a new bike. If our electrician does good work, we recommend them to our friends. If ethical funds are trying to do better, perhaps we should consider rewarding them as well. Who knows? We just might leave this world a little better than we found it.

What are Ethical Funds?

Typically ethical funds cover a wide range of socially responsible market segments and support companies that put sustainable and transparent business practices to work to protect human rights and human security, use resources with caution, protect the environment, and support the communities where they work and live. Ethical funds avoid companies involved in weapons manufacture, tobacco and tobacco products, and nuclear power and uranium mining, among others.

To compare how different ethical funds measure up in the market, The Globe and Mail website globefund.com allows you to track and analyze the performance of any Canadian mutual funds compared against a peer index. Many of the ethical funds listed are proving to be highly competitive.