The Ethical Partnership Ltd

The history of socially responsible and ethical investment

The origins of socially responsible or ethical investing (SRI) may date back to the Religious Society of Friends (Quakers). In 1758, the Quaker Philadelphia Yearly Meeting prohibited members from participating in the slave trade: buying or selling humans.

Religious institutions have been at the forefront of social investing ever since. One of the most articulate early adopters of SRI was John Wesley (1703-1791), one of the founders of Methodism. Wesley's sermon "The Use of Money" outlined his basic tenets of social investing i.e. not to harm your neighbor through your business practices and to avoid industries like tanning and chemical production, which can harm the health of workers. Some of the most well known applications of socially responsible investing were religiously motivated. Investors would avoid sinful companies, such as those associated with products such as guns, liquor, and tobacco.

The modern socially responsible investing movement evolved with the political climate of the 1960s. Economic development projects started or managed by Dr. Martin Luther King, like the Montgomery Bus Boycott and the Operation Breadbasket Project in Chicago, established the model for future socially responsible investing efforts. King combined ongoing dialog with boycotts and direct action targeting specific corporations. Concerns about the Vietnam War were incorporated by some social investors. Many people living during the era remember a picture in June 1972 of a naked nine year-old girl, running towards a photographer screaming, her back burning from the napalm dropped on her village. That photograph channeled outrage against Dow Chemical, the manufacturer of napalm, and prompted protests across the country against Dow Chemical and other companies profiting from the Vietnam War.

During this time, social investors increasingly sought to address equality for women, civil rights, and labor-management issues. In the late 1970s, SRI activism gave increasing attention to nuclear power and automobile emissions control.

During the 1950s and 1960s, trade unions deployed multiemployer pension fund monies for targeted investments. The United Mine Workers fund invested in medical facilities, for example, and the International Ladies' Garment Workers' Union (ILGWU) and International Brotherhood of Electrical Workers (IBEW) financed union-built housing projects. Labor unions also sought to leverage pension stocks for shareholder activism on proxy fights and shareholder resolutions. In 1978, SRI efforts by pension funds was spurred by The North will Rise Again: Pensions, Politics, and Power in the 1980s and the subsequent organizing efforts of authors Jeremy Rifkin and Randy Barber. By 1980, presidential candidates Jimmy Carter, Ronald Reagan and Jerry Brown advocated some type of social orientation for pension investments.

From the 1970s to the early 1990s, large institutions avoided investment in South Africa under apartheid. International opposition to apartheid strengthened after the 1960 Sharpeville massacre. In 1976 the United Nations imposed a mandatory arms embargo against South Africa. In 1971, Reverend Leon Sullivan (at the time a board member for General Motors) drafted a code of conduct for practicing business in South Africa which became known as the Sullivan Principles. Reports documenting the application of the Sullivan Principles discovered that U.S. companies were not attempting to lessen discrimination within South Africa. Because of these reports and mounting political pressure; cities, states, colleges, faith-based groups and pension funds throughout the United States began divesting from companies operating in South Africa. The subsequent negative flow of investment dollars eventually forced a group of businesses, representing 75% of South African employers, to draft a charter calling for an end to apartheid. While the SRI efforts alone didn't bring an end to apartheid, it did focus persuasive international pressure on the South African business community.

Since the late 1990s, socially responsible investing has become increasingly defined as a means to promote environmentally sustainable development. Many investors consider effects of climate change a significant business and investment risk. The Ceres organization formed in 1989 as a network of investors, environmental organizations, and other public interest groups interested in working with companies to address environmental concerns.

Representatives from the SRI industry have gathered at the annual SRI in the Rockies Conference since 1989 to exchange ideas and gain momentum for new initiatives. This conference is produced by First Affirmative Financial Network, an investment advisory firm that specializes in sustainable and responsible investing. First Affirmative and the Social Investment Forum serve as co-hosts for the conference, which has attracted over 550 persons annually since 2006.

The first sell-side brokerage in the world to offer SRI research was a Brazilian bank called Unibanco. The service was launched in January 2001 by Unibanco SRI analyst Christopher Wells and was targeted at SRI funds in Europe and the US, although it was sent to non-SRI funds both in and out of Brazil. The research was specific about Brazilian listed companies on environmental, social but not governance issues. It was sent for free to Unibanco's clients. The service lasted until mid 2002.

Two good things came out this research: 1) The idea was picked up by Mike Tyrrell, who worked at Jupiter, an SRI fund manager in London, and who developed it into something much bigger and better at HSBC and then Citigroup. 2) ABN AMRO's operation in Brazil used this research to create the first SRI fund in an emerging market, launched in November 2001. As of late 2008, this fund, called Fundo Ethical, was the Brazilian operation's biggest and best performing stock fund of any kind. (ABN AMRO's operation in Brazil was bought by Santander in 2007.)

Drawing on industry experience using divestment as a tool against apartheid, the Sudan Divestment Task Force was established in 2006 in response to the genocide occurring in the Darfur region of the Sudan. Support from the US government followed with the Sudan Accountability and Divestment Act of 2007.

More recently, some social investors have sought to address the rights of indigenous peoples around the world who are affected by the business practices of various companies. The 2007 SRI in the Rockies Conference held a special pre-conference specifically to address the concerns of indigenous peoples. Healthy working conditions, fair wages, product safety, and equal opportunity employment also remain headline concerns for many social investors.