Environmentally Responsible Investing

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Environmentally responsible investing

Environmentally responsible investing is one component of a larger phenomenon known as socially responsible investing. The idea is that investors should use their money to support industries whose operations accord with the investors' personal ethics. This concept is not a new one. In the early part of the century, Methodists, Presbyterians, and Baptists shunned companies that promoted sinful activities such as smoking, drinking, and gambling. More recently, many investors chose to protest apartheid by divesting from companies with operations in South Africa. Investors today might arrange their investment portfolios to reflect companies' commitment to affirmative action, human rights, animal rights , the environment , or any other issues the investors believe to be important.

The purpose of environmentally responsible investing is to encourage companies to improve their environmental records. The recent emergence and growth of mutual funds identifying themselves as environmentally oriented funds indicates that environmentally responsible investing is a popular investment area for the 1990s. In 1990, around $1 billion were invested in environmentally oriented mutual funds. The naming of these funds can be misleading, however. Some funds have been developed for the purpose of being environmentally responsible; others have been developed for the purpose of reaping the profits anticipated to occur in the environmental services sector as environmentalists in the marketplace and environmental regulations encourage the purchasing of green products and technology. These funds are not necessarily environmentally responsible; some companies in the environmental clean-up industry, for example, have less than perfect environmental records.

As the idea of environmentally responsible investing is still new, a generally accepted set of criteria for identifying environmentally responsible companies has not yet emerged. The fact is that everyone pollutes to some extent. The question is where to draw the line between acceptable and unacceptable behavior toward the environment.

When grading a company in terms of its behavior toward the environment, one could use an absolute standard. For example, one could exclude all companies that have violated any Environmental Protection Agency (EPA) standards. The problem with such a standard is that some companies that have very good overall environmental records have sometimes failed to meet certain EPA standards. Alternatively, a company could be graded on its efforts to solve environmental problems. Some investors prefer to divest of all companies in heavily polluting industries, such as oil and chemical companies; others might prefer to use a relative approach and examine the environmental records of companies within industry groups. By directly comparing oil companies with other oil companies, for example, one can identify the particular companies committed to improving the environment.

For consistency, some investors might choose to divest from all companies that supply or buy from an environmentally irresponsible company. It then becomes an arbitrary decision as to where this process stops. If taken to an extreme, the approach rejects holding United States treasury securities, since public funds are used to support the military, one of the world's largest polluters and a heavy user of nonrenewable energy.

A potential new indicator for identifying environmentally responsible companies has been developed by the Coalition for Environmentally Responsible Economies (CERES); it is a code called the Valdez Principles . The principles are the environmental equivalent of the Sullivan Principles, a code of conduct for American companies operating in South Africa. The Valdez Principles commit companies to strive to achieve sustainable use of natural resources and the reduction and safe disposal of waste. By signing the principles, companies commit themselves to continually improving their behavior toward the environment over time. So far, however, few companies have signed the code, possibly because it requires companies to appoint environmentalists to their boards of directors.

As there is no generally accepted set of criteria for identifying environmentally responsible companies, investors interested in such an investment strategy must be careful about accepting "environmentally responsible" labels. Investors must determine their own set of screening criteria based on their own personal beliefs about what is appropriate behavior with respect to the environment.

[Barbara J. Kanninen ]

RESOURCES

BOOKS

Brill, J. A., and A. Reder. Investing From the Heart. New York: Crown, 1992. Harrington, J. C. Investing With Your Conscience. New York: Wiley, 1992.