Shunning the profits of sin

D. Sampathkumar

JM MUTUAL Fund's soon-to-be-launched scheme will avoid investing in companies engaged in leather, meat-packing, tobacco, liquor, pisciculture, and the hotel and hospitality industry.

Evidently, the sponsors believe that there are several investors who abhor the idea of making money from investing in companies engaged in activities that might be regarded as either sinful or unethical, or both.

`Ethical investing', as schemes with such investment objectives are known, has a long tradition in the West, though it might have made its entry in the Indian mutual fund industry only now. The concept dates back to the 1920s, when the Methodist Church of North America decided to invest in the stock market.

Until then, the Church had avoided investing its funds in the stock market, as it considered equity investments a form of gambling. Incidentally, to a lot people, even today, the stock market may appear to resemble a gambling den or, to employ a more modern metaphor, the playing field of an international cricket match. But that is another story.

It is not known what prompted the Methodist Church to revise its opinion on equity investments. Perhaps the advances made in modern portfolio theory and the mathematical underpinnings to that theory may have had something to do with the perception that it is not entirely akin to wagering on the outcome of the toss of a coin.

Whatever be the reason, the Church decided then (1920s) to take an exposure to the equity instruments of corporate America. It nevertheless drew the line on investing in companies engaged in the manufacture of alcohol or in gambling. The Methodist Church was soon followed by another orthodox Christian Sect, the Quakers, whose theological rigidity was matched only by the material prosperity of its followers. Thus was born the concept of ethical investing.

But the demand for ethical investing acquired greater popular support in the wake of the Vietnam War. Some American investors started wondering if their monies were not being used to produce chemical and biological agents of destruction that the US Government was using in Vietnam in their misguided battle against communism.

Agent Orange, a defoliant, was a particularly dreadful example. It certainly failed to arrest the progress of Vietcong guerillas in their march towards recapturing the Southern parts of Vietnam, then under American control. But it did destroy virgin forests in that country. And worse, Vietnamese babies were born deformed, a consequence of expectant mothers being exposed to the harmful effects of the chemical agent during pregnancy.

From here on, it was but a short step to a full-fledged industry catering to all manners of ethical sensibilities of the investor community. Thus, companies engaged in manufacturing weedicide and pesticides too came to be shunned by managers of ethical funds, though not every type of herbicide can quite be classified in the Agent Orange mould.

One suspects that the inclusion of pesticides in the negative list of JM Mutual Fund's investment objectives springs from a mindless adherence to the Western parameters of ethical investing. It is otherwise difficult to rationalise the exclusion of all pesticides, including perhaps bio-pesticides, while retaining chemical fertilisers within the ambit of permissible investments.

In the US context, it is not just chemical agents that have been excluded but a whole range of goods and services. A case has been made against investing in companies engaged in the manufacture of products that damage or pollute the environment; unnecessary exploitation of animals; tobacco; alcohol; pornography and armaments. There are some who would go so far as to vote against nuclear power; or companies which trade with oppressive regimes. But, even by the somewhat stringent standards of the West, the JM Mutual Funds opposition to hotel and hospitality industry does seem rather strange.

Perhaps its opposition to hotels and the hospitality industry stems from the view that alcoholic beverages and meat are two strong components of their revenue streams. But the problem with such negative lists is that it is difficult to decide where one stops. For instance, if companies engaged in alcohol or cigarette manufacture are not to be supported, it becomes a case of first-order prohibition.

But a ban on supporting investments in the hotel industry because it is an indirect promoter of alcohol and meat demand in society, then, becomes a second-order restriction. The question may well be asked if a company should be encouraged when it indulges in entertaining its customers with meat and wine for winning orders? Taken to that extreme, practically all industrial activity must, in some way or the other, contribute to the growth of those industries which ethical investment managers regard as sinful.

At the heart of the problem is the desire among fund managers to seek a special niche in which to operate. In a market that is crowded with a number of mutual funds seeking a share of the investors' savings, product differentiation thus becomes the key. In the past they have sought to differentiate themselves by focussing on debt funds as opposed to equity funds. They have done so with an emphasis on sectoral funds -- witness the mad rush to set up technology funds in recent times.

The concept of `ethical investing' is an extension of this phenomenon. But on the ground of market performance, a decision to exclude liquor companies is eminently justifiable in the Indian context. They have failed miserably in rewarding shareholders by any yardstick of investment performance.

Take the case of Shaw Wallace. In nearly two years, the company's share price has not moved an inch. It continues to quote around Rs 30 now, the level traded in January 1998. Even on the perfectly simple yardstick of reporting corporate performance, its record has been disappointing. It has, from time to time, either extended the accounting year or truncated it. It seems the company finds it difficult enough even to produce financial statements leave alone create wealth.