The UK’s major "ethical" investing index is being accused of watering down green standards by including "unethical" companies.
The FTSE4Good family of indices were launched in a blaze of publicity nine months ago to encourage investment in companies with good records of corporate social responsibility.
Two companies, Close Fund Management and Direct Line, have since set up tracker funds to shadow the UK version of the FTSE4Good index.
Close tells its investors that FTSE4Good has created a "universe of socially responsible stocks".
But the New Economic Foundation (NEF), a think tank, says the UK index includes companies with "poor ethical and environmental reputations".
Oil companies BP and Shell are major constituents, despite their obvious links to climate change. The NEF says BP has been accused of colluding with the military in Colombia to protect its interests and of planning controversial new exploration in Alaska. Shell has been linked with human rights abuses in Nigeria.
Another leading constituent is GlaxoSmithKline , which has been criticised for allegedly blocking the export of life-saving HIV drugs to Africa.
As it happens, some 76 per cent of FTSE 100 stocks currently qualify for the UK FTSE4Good index. Indeed, the ten largest companies in the index are identical to the ten leading stocks in the FTSE 100 itself – essentially a mixture of banks, drugs, telecoms and oil stocks.
Some 11 FTSE 100 companies are barred because they operate in excluded sectors, such as tobacco production, weapons manufacture and the nuclear power industry.
A further 13 are excluded because they fail to meet the criteria on environmental sustainability, social issues and stakeholder relations or human rights. However, some of these filters can be passed merely by issuing suitable policy statements.
Ed Mayo, co-author of the NEF’s report on the issue, describes this as "ethics lite" – socially responsible investing, watering down the ethical criteria while claiming to apply strict environmental rules. SRI funds should have a higher moral standard.
"The growth of SRI has risked sowing the seeds of its own downfall by diluting quality standards."
Gareth Parker, head of global research at FTSE International, stands by the selection criteria. "We are still going to need oil and mining companies in the future, so it’s better to have an index that at least encourages them to do better," he says.
Mr Parker says the FTSE4Good indices are designed to "appeal to everyone", not just those with well-formed ethical viewpoints.
Crucially he says that the entry requirements will be made more stringent in the future.
Not for the hardliner
Marc Gordon, managing director of Close Fund Management, also believes the entry criteria will need to be progressively raised.
"Nobody is saying that it’s going to be perfect, FTSE4Good is never going to be for the real hardliner.
"But we have to put in place standards that are achievable, and I would like to hope that over the years standards will get harder. The only way to change behaviour is via persuasion."
Peter Webster, executive director of the Ethical Investment Research Service (Eiris), which was involved in drawing up the FTSE4Good rules, says the index is particularly useful for pension fund trustees, who may be put under pressure to reduce their tracking error from the FTSE 100.
Some 78 per cent of pension funds now incorporate SRI into their investment strategies, alongside the 4bn currently invested directly in SRI funds.
Mr Webster adds: "We plan to consistently raise the standards as more companies comply. It’s now time to move forward."
With more than 40 "ethical" funds available to choose from in the UK, Mr Webster advises would-be investors to do their research to find one that suits their individual views. Research ‘ethical’ funds
"You need to look beyond the label and find a fund that meets your concerns. If you are against oil, or pro-animal rights, FTSE4Good trackers are not for you."
Sinners beat saints
Ironically, the blue chip stocks excluded from FTSE4Good have actually outperformed their "ethical" peers over the last year.
Money Observer says its Sindex, which comprises the 25 excluded stocks (Invensys has been allowed into FTSE4Good recently) outperformed the chosen 75 by 13 per cent in the year to April 4.
The largest stocks in the Sindex are Anglo American , British American Tobacco , Rio Tinto and BAE Systems .