Good Honest Dollar $$

The recent announcement by Wal-Mart of its intention to adopt a more stringent approach toward its supply chain in terms of labor and environmental standards represents a positive step in the right direction.

Now comes the hard part – verifiable and lasting improvement on the factory floor.

 
Wal-Mart’s strategy
On October 22, the company outlined a renewed strategy designed to produce significant improvement in terms of the management of its supply chain from a social and environmental perspective.

The centerpiece of this strategy is a new supplier agreement, to be phased in over a three year period beginning in January 2009. Under the new agreement, suppliers will be required to:

• Certify (a) compliance with all relevant laws and regulations in areas in which they operate and (b) adherence to strict social and environmental criteria;
 
• Conduct their own audits, as well as co-operate with (sometimes unannounced) audits from company representatives or independent auditors;
 
• Provide the name and location of every factory which they use in the manufacturing process; and
 
• By 2012, source 95% of all manufacturing inputs from suppliers which receive the highest ratings in relation to social and environmental practices.

In addition, the strategy also includes a range of targets relating to energy efficiency and product quality and safety, with particular emphasis upon its Chinese operations.

(Refer company announcement and International Herald Tribune article for more details)

 
Lessons from Nike
Associate Professor Chris McDonald, author of The Business Ethics Blog, draws a comparison with Nike. By all means, this is a valid comparison – Nike once had a poor reputation from the point of view of labor practices within its supply chain, but its reputation has improved considerably over recent years due to improvements in public transparency and accountability.

Nevertheless, the comparison with Nike raises three interesting issues:

 
• Wal-Mart’s efforts, at least in terms of public accountability and transparency, do not appear to be as extensive as those of the sporting goods manufacturer.

Nike currently provides full public disclosure in relation to (a) the location of supplier factories; and (b) the aggregate results of audits into labor conditions at supplier factories.

The announcement by Wal-Mart does not state whether or not such information will be publicly disclosed. If not, the general public will not have means by which to verify any claimed improvement in supply chain practices.

 
• Wal-Mart’s problems go beyond its suppliers.

Whilst the problems at Nike relate predominately to its external contract manufacturing practices, those at Wal-Mart extend further, and include alleged poor labor practices in the U.S.

If the company is serious about improving its reputation, it must address all of these issues, not just the issues which pertain to its supplier base.

Moreover, responsibility for improvement cannot be simply transferred to suppliers. Wal-Mart itself has a responsibility to adopt proactive supply chain management initiatives, including the training of suppliers in terms of best practice operating proceedures. Perhaps the most important action which the company could take is to cease placing unrealistic cost and time pressures upon its supply chain - suppliers must be provided with the opportunity to make improvements in operating practices without compromising the viability of their operations.

 
• Accountability is one thing, results are another.

As noted in an earlier post, whilst Nike has made significant improvements from an accountability viewpoint, its progress in terms of verifiable improvement on the factory floor has been very disappointing, with problems occurring frequently in terms of excessive overtime, poor occupational health and safety practices and failure to pay legal minimum wages.

Wal-Mart must go beyond Nike and demonstrate a substantial level of verifiable improvement at the level of the factory floor. Until this happens, no improvement in its corporate reputation will be justified.

 
Summary
Wal-Mart is to be commended on its positive initiatives, particularly its new supplier agreement.

Now comes the hard part – results on the factory floor.

(Image provided by Hugh Beauchamp)

This is the final post in the series on socially responsible investing (SRI).

Today, I would like to outline some basic principles as to how to actually go about becoming a socially responsible investor.

But before I get into that, let me stress two important points.

Firstly, I do not intend to provide a complete guide toward ethical investment – such a guide would be beyond the scope of this discussion and I intend to simply outline a few common sense basic principles. Readers are encouraged to add any thoughts of their own.

Second, I am not a qualified financial planner. As such, I cannot, and will not, recommend specific investment strategies, and the information presented here is intended for general discussion purposes only.

Indeed, this brings me to my first point:

  
• Consult a qualified financial planner.

For those with a substantial sum of money to invest, obtaining professional advice prior to making any form of investment decision is a prudent course of action.

Ethical investing is no exception - there are a considerable range of options available and your financial planner is in the best position to provide advice in relation to the strategies which are most appropriate for your individual circumstances.

In addition, should you choose to invest via an SRI fund, your financial adviser can also advise you as to which funds are considered to be the most reputable.

  
• Learn about ethical investing.

Notwithstanding the point above, conducting your own independent research is also a good idea.

In particular, you would want to gain a basic understanding in the following areas;

(1) Investing in general – how share, property and bond markets work, along with the basic workings of managed funds and retirement accounts.

(2) Ethical investment – the nature of ethical investment, the range of approaches available, and the workings of SRI funds.

(3) The corporate reputation of any prospective investee companies as well as any key ethical issues confronting the industry in which they operate (only relevant for those who purchase shares directly, as opposed to community investment or investment through an SRI fund).

  
• Determine your core ethical principles.

There are many, many issues which could be considered within the ethical investment process. Just to name a few, these could include – environmental management, labor rights, world poverty, legal compliance, corporate governance, technological advancement, legal justice, education, public health, transparency, corruption, war, political & religious freedom, product safety, resource management, ethical sales and marketing practices.

It is most unlikely that there are any investment options which satisfy every possible ethical issue, and therefore it is important to focus upon the core issues about which you feel most strongly.

My suggestion - choose five core issues and/or principles, and focus primarily upon these during the decision making process.

  
• Determine your ‘style’

One issue which will have an impact upon determining the approach which is most appropriate for you is your investment style  - in particular, your appetite for risk and whether or not you wish to take an active or passive approach toward the management of your investments.

Those who are most comfortable with a more passive approach, for example, may be best suited toward investing through as SRI fund. Community investing may also be an option.

In contrast, those wishing to take a more active approach may prefer to select their own investment portfolio via direct investments in the share, property or bond markets. Such investors may also consider becoming involved in some form of shareholder advocacy.

Finally, those with a particular burning passion, who are willing to undertake a considerable level of risk, may wish to invest their financial and/or time resources into some form of social entrepreneurial type project.

  
• Determine your financial goals, objectives, and priorities.

Ethical investment decisions must be consistent with two core items – your ethical investment priorities and your financial investment priorities.

Your financial priorities should guide your decisions in terms of determining an appropriate growth profile of prospective investments as well as an appropriate risk profile.

My suggestion - make a list of financial goals, for the next one, three and five years. Depending on your circumstances, it may be appropriate to set even longer term goals, particularly if you are in the process of planning for retirement. But I would think that five years would be an appropriate time horizon at a minimum for the majority of investments.

  
• Act.

Once the due diligence process is complete, it’s time to act, and to enjoy the satisfaction of knowing that however large or small, your investments are having a positive impact upon the world in which we live.

When business and conservation groups fight against each other, both tend to lose out.

On the other hand, when they work together, mutually beneficial results are often achieved.

Today I would like to highlight the new Integrated Biodiversity Assessment Tool (IBAT), a wonderful example of a common sense project which can occur when large business and conservation groups work together in a spirit of mutual co-operation.

  
The problem
New business projects, such as construction of mines, pipelines, and many other forms of infrastructure, often have a significant impact on the area concerned from a viewpoint of biodiversity.

In order to prevent or mitigate this impact, or to avoid costly modifications to the project at later stages, it is crucial that such concerns are considered during the early stage of the planning process.

However there are at least two key barriers toward this end:

• Companies may be reluctant to share their plans with conservation groups until planning has reached a considerably advanced stage, lest they give away sensitive information.

• The process of conducting Environmental Impact Assessments (EIAs), which can involve compiling a substantial volume of information from a wide range of disparate sources, is arduous at best, and is often not complete prior to crucial decisions having to be made.

  
The solution
What business needs is a one stop shop – a singular, comprehensive, publicly accessible database which details, in consolidated form, complete information about each and every significant biologically sensitive area on a worldwide basis.

This is the objective of the IBAT, a consolidated web based analytical database which has been developed by Conservation International, in conjunction with a range of conservation groups and corporate partners.

  
How IBAT Works
Say, for example, that BP plans to build a new pipeline or road.

Regardless of where in the world the project is to take place, BP will be able to use the database to determine:

• whether or not any proposed construction routes intersected with legally protected areas;

• whether or not any such routes intersect with area which are not legally protected, but which are otherwise considered to be of significance from a conservation viewpoint; and

• which licenses or permits which, if any, the company will require.

Further, IBAT will also enable the company to explore each individual site in a considerable degree of detail and gain an in depth understanding of specific biological issues associated with the proposed construction routes, in turn providing guidance during the EAP process.

  
How IBAT benefits business
The benefits of IBAT to business will be twofold:

• Better information – earlier.

By helping companies indentify and accommodate specific conservation related concerns at an early stage of the planning process, the database will help to avoid: the need for significant adjustments to the project at a later stage; and/or any adverse reputational impact from allowing potentially destructive plans to reach advanced stages.

• Anonymity.

After an initial registration process, companies will be able to use IBAT on a completely anonymous basis, allowing them to search the database without fear of alerting external parties to any plans under consideration.

  
Environmental benefits
The benefits of IBAT from a conservation viewpoint are equally as clear.

The earlier that potential biodiversity related concerns are identified within the planning process, the greater the likelihood that firms will be willing to make adjustments to projects in order to accommodate such concerns.

  
Sleeping with the enemy produces results
Perhaps largely due to issues of mistrust, some on the side of both business and conservation have been reluctant to embrace any form of collaboration.

However, the IBAT initiative is a shinning example of the benefits to both which can accrue when they put aside any differences and work co-operatively toward mutually beneficial solutions and outcomes.

A desire on the part of investors for their money to be invested in a socially responsible fashion has fuelled exceptional growth rates within the Socially Responsible Investment (SRI) industry in recent years.

But can we actually verify that SRI funds are as ‘responsible’ as they claim?

Potentially not, commentators such as Paul Hawken claim, due to a lack of transparency within the industry, which they see as a serious impediment to informed decision making from prospective investors.

 
What does my fund invest in?

One of the key problems, according to Hawken, is a failure on behalf of many SRI funds to provide adequate disclosure about specific holdings within their portfolio.

The majority of funds explain the broad principles which they follow in relation to how ethical issues are taken into account during the investment selection process. However, many fail to provide specific details in relation to individual companies which are included within the portfolio.

As a result, prospective investors are unable to determine for themselves which specific companies these funds invest in. This, in turn, results in two adverse consequences:

• it makes it difficult for investors to determine with any degree of certainly whether or not such investments are compatible with their personal values; and

• it means that prospective investors have no way by which to verify or substantiate claims made by fund managers in relation to the overall social responsibility of the portfolio. 

This is particularly troublesome given industry criticisms that some funds are not as ethical as they claim. Such concerns have been heightened by the recent case of Pax World Management Corp., a well known SRI fund which was found by a recent SEC examination to have invested in ten securities which violated its own stated rules of avoiding firms in the defense, alcohol, gambling and tobacco industries.

 
Hawken’s Solution
In order to have sufficient information upon which to make informed decisions relating to the selection of SRI funds, Hawken believes that prospective investors should be able access the following information online:

• a complete listing of the entire holdings of the portfolio in question; and
• a thorough analysis of the strengths, impacts and weaknesses of each firm within the portfolio from an ethical perspective.

 
My viewpoint
With respect, the above recommendations go too far in my view.

I agree that SRI funds need to move toward greater transparency and accountability. I also agree that prospective investors need a greater degree of visibility in terms of the investment portfolio of SRI funds.

Nevertheless, the value of such information must be weighed against the cost involved in its provision. Furthermore, provision of the extensive information which Hawken proposes would be a costly exercise, particularly given the need to continually update such information on a very frequent basis to account for changes in holdings of the portfolio.

These expenses would be paid for by investors, and whilst I can appreciate the benefits of this level of disclosure, I do not believe that such benefits would be sufficient in order to justify the additional costs involved.

 
My alternative suggestion
In my view, a less extensive disclosure regime is appropriate, and SRI funds should not be required to disclose their entire holdings.

Instead, investors should be able to go online and view:

• a list of the thirty most significant firms within the portfolio; and
• a plain English summary of the strengths and weaknesses, from an ethical viewpoint, of the firms in question.

The list need not be up to the minute, but should be updated on a frequent, periodic basis.

The above disclosure, in my view, should be sufficient to enable investors to make informed choices about whether or not the fund in question satisfies their requirements from an ethical viewpoint, without imposing an excessive level of administrative requirements on behalf of the fund.

The lack of ethical behavior on behalf of financial institutions for their role in the current financial crisis in the U.S. is well documented.

The finance industry neglected its duty of care in two key areas – advancement of credit beyond levels which borrowers could afford, and failure to manage their loan portfolios with sufficient prudence so as to ensure their long term survival.

Their neglect of this duty has widespread consequences, particularly for borrowers, taxpayers and the economy as a whole.

But do borrowers have to share some of the responsibility? Yes and no.

The responsibility of borrowers
Some commentators, such as business ethics motivational speaker Chuck Gallagher, feel that borrowers need not accept responsibility for the current situation.

To a degree, this viewpoint is fair enough. Borrowers, after all, did not cause the collapse of financial institutions – this was caused by internal mismanagement of loan portfolios by the institutions themselves.

Nevertheless, what borrowers are responsible for is their own debt commitments. Borrowers, in my view, owe a duty of care not to borrow in excess of their debt servicing capacity.

Prior to taking out a loan, borrowers have a responsibility to make a realistic assessment of whether their debt servicing capacity is likely to be sufficient to meet their loan commitments, and also to ensure that they fully understand the terms and conditions of the loan. Most importantly, borrowers have a duty to refrain from accepting any offer of credit which exceeds their anticipated debt servicing capacity.

Any borrowers who do not possess sufficient expertise to do this for themselves should seek independent financial counsel prior to the acceptance of any loan.

To be sure, many borrowers may have been bombarded with aggressive marketing campaigns from lenders. As human beings, they are susceptible to such campaigns. This, however, does not absolve borrowers of responsibility for their own decisions.

Of course, some borrowers experience difficulty through no fault of their own. Unexpected circumstances, such as job losses or personal injury can easily cause even diligent borrowers to default on loan commitments.

I am not referring to such cases here. Instead, I am referring to cases where borrowers over-borrow in the first place.

In a nutshell
Borrowers did not cause the financial crisis – irresponsible lending practices and poor loan portfolio management did that.

But each and every individual borrower is responsible for ensuring that they do not accept credit levels beyond their anticipated debt servicing capacity.