Ethical investing comes to India
By Raja M

MUMBAI - India joined the globally growing ethical-investing force with its first socially responsible investing (SRI) fund, the newly launched Amro Sustainable Development Fund, which favors companies with high-disclosure policies on environmental, social and corporate governance yardsticks.

Crisil, one India's leading credit-rating agencies, will short-list companies for the fund by using the Standard & Poor's CNX 500 index. India's first broad-based index of the country's stock



market, it contributes to 92.6% of total market capitalization, besides 86.4% of total turnover on the National Stock Exchange, according to exchange figures.

"We believe that the availability of such products will significantly increase flows into emerging markets, but it is too early to predict how large they will be," Subir Gokarn. executive director and chief economist at Crisil, informed Asia Times Online.

In a development confirming the potential of the ethical market in India, Crisil, S&P and KLD Research and Analytics won a competition launched last year by the Washington-based International Finance Corp (IFC), the private-sector arm of the World Bank, to create an ethical-based index of leading Indian firms. The corporation gave US$250,000 to the winners to create the index.

"Specifically, the index will evaluate the transparency, disclosure and management systems of companies," said Robin Sandenburgh, principal environmental specialist of the corporation's environment and social development department. "The initial universe for the index will be the 1,000 largest companies listed on the Indian stock exchanges. The index should be ready [at the] beginning of 2008."

ABN AMRO's mutual fund would then invest 65% of its capital in companies that deliver well on ethical parameters. Mutual funds are savings invested by the mutual-fund company in stocks, shares, bonds and debentures, and are an increasingly popular investor option in India (see The mutual fund boom in India, Asia Times Online, September 27, 2006).

"Around $4.5 trillion to $5 trillion is the current value of the SRI market," Graham Owens, director of the Malaysia and Singapore-based Owens, Williams & Wood, SRI specialist consultants, informed ATol. "Asia has around 150 SRI funds/products, and this has around $25-30 billion under management - so there is plenty of scope."

Europe, Owens said, has over 450 funds and over 250 in the US and about 20 in South Africa."If we take the global market there are probably around 1,000 funds/products available."

Mutual funds targeting well-behaved companies are a growing force, and it reflects the variety and creativity of mutual funds. ABN AMRO runs the fifth-largest ethical mutual fund in Europe, and has 24 such schemes in Europe, Asia and Latin America.

SRI generally means putting money in companies with wholesome corporate values whose products and services do not ruin health or the Earth. Some such funds are also tied to specific religions, such as Christian- and Islamic-based funds, while others reject companies discriminating against homosexual employees.

These funds are opposed to "vice funds" on the "Devil's Index" where only profit counts, not the manner of profit and damage caused. Vice funds target "recession-free" companies such as those in gaming, tobacco, alcohol, aerospace and defense, and are gloomily based on the principle that as long as there are humans there will be a market for harming oneself and others.

So vice-fund managers will hug tobacco and liquor companies that are generally banned by ethical-fund managers. Both kinds of managers claim the going is good for them. A certain subset of ethical-fund managers, though, might invest in Devil's Index companies that follow honest trading practices.

The number of ethical funds emerging in South Asia, and in the world's second-most-populous country, means conscience investing is developing more global muscles. SRI can mean both socially responsible investment and sustainable responsible investment.

"In North American, SRI usually stands for 'socially responsible investment', while in Europe and Asia, it typically refers to sustainable and responsible investment," said Melissa Brown, executive director of the Hong Kong-based Association for Sustainable and Responsible Investment in Asia.

"Some institutional investors, such as pension funds, prefer the name 'responsible investment'. Either way, they stand for an approach which evaluates both financial fundamentals and environmental, social and governance performance."

Brown sees excellent potential for ethical funds "due to the rapid growth of demand for investment funds which can meet the investment objectives of Indian retail investors". Her association, a non-profit agency, works to promote socially responsible investing in Asia, and its members include institutions managing more than US$4 trillion in assets.

An alternative viewpoint maintains that ethical funds are facing a crunch due to higher costs, such as the research needed to find accurate appropriate investment targets compared with other funds. But according to new research from financial-services consulting agency NMG, client interest in ethical funds is increasing.

"Green investments do not necessarily mean lower returns, and in many cases the performances of green investments or sustainable, responsible investments have outperformed those of traditional asset classes," say the organizers of the "Sustainable Responsible Investments Asia 2007" conference planned to be held in Singapore in October.

Asia is not new to socially responsible investing, with the Kingsway SRI Asia Fund launched in Hong Kong in 2002 being one of the earliest. Malaysia-and-Singapore-based Owens, Williams & Wood, specialist consultants, point out that it is myth to say that responsible Asian stocks will always underperform against conventional stocks.

Their index provides plenty of evidence that ethical investing in Asia delivers returns that are at least as good as and often better than conventional investments. According to the consultants, Asian SRI stocks are increasingly favored by local governments and government-linked pension schemes.

Another argument revolves around what kinds of yardsticks are needed to measure the social responsibility of companies. A leading Indian financial magazine, for instance, criticized the new ABN AMRO fund, saying, "Crisil's current methodology does not match international standards and only evaluates companies primarily on disclosures and transparency, but does not evaluate the company's performance on [ethical] issues."

Crisil told ATol that its transparency and disclosure approach is just one phase of a developing multi-phase approach. "However, experience suggests that good managements are candid and forthright with their shareholders and, to that extent, high transparency scores are a reasonable indication of good practices across the board," said Gokarn, whose firm is overseeing the ABN AMRO fund.

Given the increasing environmental and a social awareness of a younger population (the median age in India is 24, compared with 40 in the US and 45 in Europe), the future of ethical funds can only get brighter in Asia.

"Strong concerns about environmental and social issues are making ethical funds a popular choice for many people," agreed Julie McDowell, head of SRI at Scotland-based Standard Life Investments, with offices in Hong Kong, South Korea and China.

As a happy outlet for investors concerned about the color of their money, the global SRI club will have many more Asians.

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