King & Shaxson Asset Management: History of ethical investment

Socially responsible investing (SRI) has recently entered the mainstream, with environmental, social and corporate governance (ESG) credentials being all the rage amongst investors as social inequalities and the imminent climate disaster have become too evident to ignore. However, the concept of investing within a set of personal values is not a new phenomenon and it has a rich history that is entwined with religious beliefs and political movements.

Ethical investing can be traced back to biblical times in Jewish law (1500-1300 B.C.E), which applied to all aspects of life. Tikkun Olam translates from Hebrew as “repair the world” and evokes a duty to serve those in need. Tzedek can be seen as a call for justice and equality, aiming to correct the imbalances that humans inevitably generate, including from ownership. As an owner, you had the right and responsibility of how that holding was used, the most important being to prevent any immediate or potential harm. By extension, shareholding is a form of ownership and investors must consider the ethical responsibilities of owning that share.

The Qur’an, thought to have been written between 609 and 632 C.E, established guidelines surrounding investments based on the teachings of Islam. Today this is known as Shariah-Compliant Finance. Riba is an Arabic word meaning ‘to increase’ or ‘to exceed’, and it is commonly translated to ‘interest’ or ‘usury’ in English. In Islam, Riba is forbidden because it is seen as an exploitative arrangement. The poor are stuck with ever-growing debts whilst the rich increase their wealth without creating any extra value, thereby cementing a gap. Interest is central to the modern banking system and this is a significant reason for the reluctance of some Muslims to engage fully with the financial sector. The Qur’an also forbids any Islamic institution or individual from investing in alcohol, pork, gambling, armaments, and gold and silver.

Quakers are members of a group called The Religious Society of Friends, they have been based in England since the 1650s and were amongst American colonists. Whilst the group is primarily interested in Christianity, it is well known for its pacifism and opposition to slavery. In 1758, Pennsylvanian Quakers prohibited its members from engaging in slave trading which can be seen as one of the first occurrences of socially responsible investing in its current form. John Wesley, the founder of Methodism in the 18th century, outlined his stance on social investing during his sermon “The Use of Money”. He urged his followers to shun profiting at the expense of their neighbours, this avoided partnering with those who earned their money through alcohol, tobacco, weapons or gambling. These are often referred to as sin stocks and form a basic negative screen to this day.

As a discipline, socially responsible investing took big steps forward in the US as a result of political movements and dissatisfaction with the Vietnam War in the 1960s. Protestors boycotted companies that provided weapons for the war whilst groups of students demanded that university endowment funds were no longer invested in defence contractors. Coinciding with this, awareness of civil rights and racial issues rose in prominence. Movements began bridging the gap between corporate and investor responsibility. In support of this, trade unions such as the United Mine Workers and International Ladies’ Garment Workers’ Union deployed targeted investments into medical facilities and union-built housing projects. By the 1970s SRI considerations were here to stay, social activism continued to spread alongside a growing consideration for the environment. The first Earth Day was celebrated in 1970 and the threat of pollution from nuclear was heightened with the Three Mile Island nuclear power plant accident. Reflecting this growing awareness, the Pax World and First Spectrum funds were established that combined social and environmental consciousness with financial objectives.

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