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Who gets the green light?

When a company takes a PR battering from charities or environmentalists, it can throw up a host of problems for ethical funds.

Yet who decides what is ethical and what is not? What happens when a certain stock suddenly comes under the spotlight? GlaxoSmithKline, for example.

The recently merged pharmaceutical company, along with other companies, is to take the South African government to court over patent infringements for importing cheaper generic drugs to deal with the country&#39s Aids crisis. Only 25,000 of Africa&#39s estimated 25 million Aids sufferers have access to Aids&#39 medication.

Oxfam has been targeting GlaxoSmithKline as part of its Cut the Cost campaign directed at the behaviour of pharmaceutical companies in the Third World.

But Oxfam senior policy adviser Sophia Tickell says: “I do not see any particular value in putting pressure on people to disinvest from GlaxoSmithKline. Withdrawal would remove the single most important leverage to bring about a change in corporate practice.”

At the same time as GlaxoSmithKline is getting massive international criticism,investors and their advisers might be surprised to find its shares make up the second-biggest holding in Credit Suisse&#39s fellowship fund man-aged by Suzie Kemp.

Legal & General&#39s recently launched ethical fund also had GlaxoSmithKline as its second-biggest holding but disposed of the shares following the merger and advice from Eiris, the independent ethical investment advisory service.

Kemp says she looks for investment ideas rather than ethical stories. However, she says there have been occasions when she has decided to sell stock due to ethical rather than investment concerns. When Iceland bought Booker, the increase in its percentage of alcohol and tobacco business meant the stock no longer fitted the ethical criteria of the fund, leading to disposal.

Kemp also had to monitor the situation carefully when Royal Bank of Scotland, whose stock features heavily in the fund, came under pressure not to renew its loan to beleaguered biotechnology company Huntingdon Life Sciences.

Asked how she will deal with the present situation, Kemp says: “We are looking into GlaxoSmithKline at the moment but have not come to any decisions yet.

“If we decided to dispose of GlaxoSmithKline stock, we would sell at a point that was in the best interests of the investors. That would take place within six months of the decision.”

IFA Ethical Investors consultant Christopher Deacon says ethical funds differ widely in the criteria that they apply. He mentions Framlington health as a fund that describes itself as ethical but whose profile is at variance with other ethical funds.

NPI&#39s global care growth fund is one that he mentions as exemplary from an ethical point of view.

Of the Credit Suisse fellowship fund, Deacon says: “It has fewer negative criteria than most. It is not one that we would recommend that much.”

Holden Meehan adviser Dan Kemp says the Credit Suisse fund is less robust than many in its ethical stance but would still be appropriate for a “lighter green” investor.

Advisers have to consider ethical and investment performance. Dan Kemp points out that the more stringent ethical funds have independent committees to monitor the fund&#39s ethical criteria alongside their own research committees. Examples of this are the Jupiter environmental and ecology, Standard Life UK ethical and Friends Provident Stew-ardship funds.

None of the ethical sub-divisions used by Eiris in its research would have applied to the present GlaxoSmithKline situation. But head of client services Karen Eldridge says, in addition to its principle-based research, it carries out a media monitoring service which would have highlighted the problem.

Ethical performance is harder to track and evaluate than investment performance. Many funds, such as Credit Suisse&#39s fellowship and Legal & General&#39s ethical fund, rely on Eiris to monitor performance to a preset ethical menu.

IFAs also survey ethical performance. Ethical Investors, for example, has its own research team to carry out in-house monitoring. Deacon says his firm has a detailed ethical questionnaire to find what products meet a client&#39s requirements.

Holden Meehan directs clients to appropriate funds. Funds with strict ethical criteria will have their own research teams and independent committees. Dan Kemp points out that if a fund calls itself ethical, it is a compliance issue.

He says: “We do not approach clients differently. As part of our basic questionnaire, we ask if clients have ethical or environmental concerns. If they say no, we just move on to the next question.”

Clients expressing an interest in ethical investment would be taken over the top 10 stocks of a particular ethical fund to give them a flavour of what is involved.

Holden Meehan supports the UK Social Investment Forum lobbying for an ethical question to be included in the standard fact-find.

Since last July, company pension schemes have been obliged by law to disclose their ethical policy. An opinion poll commissioned by Eiris and carried out last year showed that three out of four people want their pension to operate on an ethical basis.

Meanwhile, Amnesty International&#39s magazine is as full of advertisements for Isas as some financial publications. And what about GlaxoSmithKline&#39s share price? It has continued to rise dramatically.


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