It makes sense that a mining company that produces uranium would be considered unethical by those who disapprove of the metal. Nevertheless, WMC, which mines uranium at Olympic Dam in South Australia, features in many "socially responsible investment" (SRI) portfolios. And the wine maker Southcorp is considered socially responsible by some ethical investors even though alcohol companies would be excluded by others because of the potential social damage of their products. Ethical investing presents such a confused picture that managers of the increasingly popular SRI funds (also known as "ethical" funds) are turning to the growing ranks of "green gatekeepers" (ethical researchers) to help them decide where to put their money.

     WENDY MOORE: "The point is to educate people as much as possible", Image: Robert Rough

If the principles behind socially responsible investing are unclear, its popularity with investors is not. The retiring director of investment strategy at Deutsche Bank Australia, Don Stammer, says SRIs in Australia, now totalling about $2 billion, are forecast to increase to $35-40 billion over the next 10 years.

The trend is firmly established in the United States and Britain: in the US, $US2.16 trillion (one investment dollar in eight) is invested ethically; in Britain, the figure is UK pounds 3.3 billion, up from UK pounds 199 million in 1989.

Several big Australian institutions, including AMP Henderson Global Investors, Rothschild Australia Asset Management and Westpac Financial Services, have set up ethical funds. Although the highly qualified people in these firms can assess financial performance, earnings outlooks and the quality of management, they struggle when judging ethical performance. Consequently, they are turning to green gatekeepers. These people - usually members of small, independent firms and from diverse backgrounds (including investment banking and funds management) - all want to see the principle of social responsibility at work.

Rothschild Australia Asset Management's senior manager of product development, Mark Watmore, says Rothschild, which launched its Ethical Share and Ethical Conservative Trusts in April this year, has commissioned the Sustainable Investment Research Institute (Siris) in Melbourne to do its SRI research. "Our core competency is not ethical research," Watmore says. "We knew we would look outside for that."

The chief executive of Siris, Mark Bytheway, says the SRI movement is based on the idea that a company's value cannot be assessed simply by checking its profit statement or price/earnings ratio. "The definition of wealth is changing," he says. Bytheway, whose background is in funds management, says a company's performance on environmental, industrial relations and philanthropy issues is now considered. Siris does ethical research for several clients, including Rothschild.

Duncan Paterson, researcher, corporate ethics, at the Centre for Australian Ethical Research (CAER), says a personal commitment to the environment helped shape his career. In 1996, Paterson worked in London for a British charity, the Ethical Investment Research Service (known as Eiris). "At that stage, the generally accepted wisdom was that (SRI) was a hippie, fringe thing," he says.

Although ethical researchers deny suggestions that they have influence over large amounts of money, Paterson acknowledges that the investment community and companies are more aware of SRI issues. He says many company executives are telling their managers that, if they fail to deal with the expanding ethical investment movement, they could find themselves locked out of a large part of the market. "I think that what we are doing is giving these concerned people an extra tool when they raise the issues internally."

Wendy Moore, the director of the SRI research company Business Ethics Research Centre (BERC), says she has been amazed at the growth of ethical investment. Her company does research for several SRI financial planners, including Eco-Logical Investments in Queensland and Ethical Investment Services in Melbourne. BERC, in operation since 1995, says it is Australia's longest-established provider of information for ethical investment.

Moore says her interest in ethics was sparked during the Gulf War, when a group of university friends involved in a protest movement against US actions, got her thinking about social issues. "It had never occurred to me there was a relationship between business and ethics," she says. Moore attended an ethics class and eventually got a business degree with a minor in ethics. She began her business after meeting Terry Pinnell, a financial planner looking for help in deciding which companies would be suitable for SRI.

Much of the confusion surrounding SRI stems from the fact that each investor has a different idea of what constitutes an ethical investment. Some shun tobacco, wine and gaming companies but others, who see these industries as simply catering to people's choices, refuse to invest in mining companies because of their poor environmental records. "Different people have different ways of coming to a decision about what is ethical and what is not," Moore says.
"The point is to educate people as much as possible."

Most of BERC's work involves compiling company profiles, which consider a range of factors including environmental records, land rights, defence-related issues and human rights. Moore's profiles do not make judgments on a company's SRI suitability. Rather, they present facts for investors to digest. For example, a BERC report on the wine maker Southcorp (often excluded from SRIs), provides details about its products but also highlights its affirmative-action policy.

Green gatekeepers say the process of researching a company's ethical performance is exhaustive and detailed. Information is collected from many sources. The initial research on a company can take between 50 and 75 hours. Company reports, documents and questionnaires must be ploughed through, as well as government and media reports and court decisions; and government agencies and environmental and union organisations, consulted. Research firms must constantly monitor companies and update their reports if necessary.

Paterson says: "It is quite a difficult process, and that's one of the reasons we like to keep communication lines with companies as open as possible."

Reporting on SRI issues can be a problem for companies. Origin Energy, which was spun off by Boral in February last year, took part in SRI research from the start. Origin's general manager, human resources and safety, John Hayward, says: "We have a commitment to participate in the process, from the board ... to the management team." Although Hayward considers Origin has a good ethical record, he says it has struggled to find the documentation to prove this. The problem is exacerbated by the variety of SRI research methods. "Finding the right people who have the right information has been difficult," he says. "There is a huge difference in the type of information (the researchers) are seeking." For one research project, Origin must complete 33 surveys.

The executive general manager of corporate and investor relations at PaperlinX, David Shirer, says the company has tried to respond to the many requests for information from ethical investment researchers, but does not have the resources to provide the volume of information requested. "We would rather talk to our shareholders directly," he says.

The consultation between an ethical investor and a researcher begins when the investor approaches Siris or CAER with guidelines setting out the type of companies they wish to invest in. The research firms then check the guidelines against their databases and suggest companies that fit the client's principles. The researchers do not offer opinions about a company's ethical performance. Bytheway says: "We don't tell people what an ethical company is." Moore, Bytheway and Paterson emphasise that their firms do not provide financial information or advice. "We deliberately keep the ethical stuff quite separate from the financial stuff," Moore says.

There are three main methods investors use to determine an SRI. The most popular is negative screening, in which companies are excluded from SRI for a variety of reasons, including their environmental records, their products or their company policies.

Positive screening includes companies that have a good environmental or social record. This may include companies that are involved in developing sustainable energy sources, have a good philanthropic record or have equitable industrial relations policies. The third method is the best-of-sector approach, which allows SRI investors to invest in, for example, mining or tobacco stocks by selecting the "least worst". Some experts say this approach allows companies with poor environmental or poor ethical records to be viewed as an ethical investment.

The head of Australasian business at Zurich's Sustainability Asset Management Group (SAM), Mark Mills, says his company uses a best-of-sector approach. "We have a very low emphasis on negative activity," he says. "The message (of negative screening) is easier to communicate, but I don't think it's that simple." Mills, a former director of marketing at Credit Suisse First Boston, gives the example of the ethical investor who goes to a financial planner, denounces mining and oil companies, and then drives home in their car, burning petrol and polluting the air.

 DUNCAN PATERSON: Research is a difficult process and communication lines are kept as open as possible, Image: Jacky Ghossein

 SAM has created the Dow Jones sustainability group index (DJSGI). It now comprises about 240 companies that lead their industries in long-term economic, environmental and social criteria (sometimes referred to as the "triple bottom line"). Sustainable investing has been described as a subset of SRI in that it takes a long-term approach to environmental issues by recognising that some damaging practices may be necessary until safe methods can be found.

 Companies are then rated using SAM's research approach, which includes using questionnaires returned by companies and thorough media analysis. Two ratings are given: "opportunities", which rewards companies that have embraced sustainability as a commercial opportunity; and "risks", which rewards companies that, for example, have strategies to reduce the risk of pollution. The highest-rating companies are then included in the DJSGI. Financial institutions subscribe to the index to help them plan their SRI strategies.

The use of ratings is another controversial issue in the SRI community. Some argue that the information on which researchers base their company assessments is too objective and complex to fit into a simple numerical form. How do you rate a company that recycles metal but has been convicted of price-fixing? Does a company that safely mines uranium rate higher than a technology company that pollutes a river?

A ratings system also assumes that the research firm has been able to get the same information from every company, but Mills admits companies are only "slowly getting used to reporting on these things".

Despite the problems with ratings systems, Moore says the investment community still wants an easy way to discriminate between the ethical standards of companies. Paterson says that ratings, although they can be problematic, are important in giving companies an idea of their progress in ethical performance.

Mills says a set of reporting standards would allow companies to produce better-quality information and improve the overall quality of SRI research. His company is involved in the Global Reporting Initiative, a working party set up in 1997 by the Coalition for Environmentally Responsible Economies in partnership with the United Nations Environment Program. It is attempting to create a set of reporting guidelines than can be used worldwide. Hayward would like the information requests to be standardised so that reporting on ethical matters is as consistent as reporting on accounting matters.

Shareholder watchdogs

Several green shareholder groups involved with companies such as BHP Billiton, Boral and Wesfarmers have tried for many years to change company attitudes to environmental issues. Now the ethical investment movement is gaining momentum. The co-ordinator of BHP Billiton Shareholders for Social Responsibility, John Poppins, says his group is a loose collective of about 80 like-minded shareholders who volunteer their time to monitor BHP Billiton's behavior. "We have no money at all," he says. "We don't even have a treasurer." Nevertheless, Poppins believes the group has been able to influence management. "The most active thing we have done in the past year was to write to the chairman ... asking him to allow some small magnetite leases (in environmentally sensitive areas) to lapse," says Poppins. In February, the leases lapsed.

The BHP group was formed in 1994 because of the environmental damage done to the Ok Tedi and Fly Rivers in western Papua New Guinea by BHP's Ok Tedi copper mine. Poppins says that, although his shareholding in BHP has been financially rewarding, "I don't want my dividends coming at the expense of people on the Fly River".

Poppins is also a member of the PaperlinX Ethical Shareholders group, which has more than 100 members. The secretary of the group, Wendy Radford, says its members are mainly older shareholders with a commitment to the environment. "They are people who are looking at the future of the world and largely have years of experience in the business world behind them."

The group is concerned that the logging PaperlinX does in Australia is damaging the environment. It wants the company to consider more sustainable practices. "We have just tried to make other shareholders realise that forests aren't tree farms," Radford says. She says that, although senior PaperlinX executives been open to the concerns of the group, repeated requests to speak to board members have been denied. "We see (the board members) as our representatives," she says. PaperlinX's executive general manager of corporate and investor relations, David Shirer, says the board wants senior executives to deal with the group. He says executives and the group meet at least once a year. PaperlinX recently invited the group on a tour of its milling operations in Marysville, Victoria, and will meet with the group before its next annual general meeting, on October 25.