Investing with principle: ... ethical investment movement in the UK.

Charles Jacob grew up in poverty but has since made millions. However, his is not a rags to riches story. For Jacob, who is known as the father of ethical investment in Britain, made most of his money for other people. Though he is now comfortably off, he has put much of his own money into a charitable fund.

His father died when he was five, leaving his family with no home of their own and no money. Charles grew up with his mother and sister in poverty in south-east London in such cramped conditions that he sometimes had to sleep in a badly chipped bath.

He joined the youth club and Sunday school at a local Methodist church `because it was the nearest'. This was the start of his life-long commitment to Methodism. When he was 14, the man who ran the youth club got him a job as office boy at the stockbrokers Nathan and Rosselli.

Jacob eventually worked his way up to become a partner. When Nathan and Rosselli merged with James Capel, Jacob created their successful gilt-edged and fixed-interest department. But in 1970, just when he was at the peak of his career, he had a breakdown. For three years he was `virtually a vegetable on heavy medication'. Doctors told him he would never work again.

Jacob now says, `I don't believe that God sends suffering into this world, but I am absolutely convinced that he uses it for his own purposes, if we allow him.'

In 1972 the Central Finance Board of the Methodist church asked him to work for two days a week as the first professional manager of their investments. So, despite continuing poor health, Jacob put the word about that he needed an office from which to administer the 3-4 million then under the Board's control. (Under Jacob this figure eventually rose to over 250 million.) One of the 14 offers he received was from First Investors and Savers unit trust company.

At the interview Jacob mentioned that he had been studying ethical mutual funds in the USA. Their investment stance was usually negative, for example avoiding companies involved in South Africa. Jacob said that he wanted to establish an ethical investment fund in the UK which would use positive as well as negative criteria. `To my amazement the directors were very supportive of this idea.' First Investors made him a director and, in exchange, he was given an office and all the facilities he needed both to develop the new concept and to manage the Methodist investments.

After many months of research a proposal, financially supported by the Rowntree Trusts, was submitted for final approval to the Board of Trade. To the surprise of the financial market the Board refused, arguing that there could be a conflict of interest between the need to make a profit and the need to make conscience-based decisions. Jacob was bitterly disappointed but now feels that the idea was ahead of its time.

To finance his church activities, Jacob began managing funds for various charities and educational institutions, mainly in Wales (for which he was later awarded an MBE).

Later, a meeting with Sir Nicholas Goodison, Chairman of the Stock Exchange, proved to be a turning point. He immediately responded to Jacob's vision. He was able to persuade the renamed Department of Trade and Industry to grant permission in principle for an ethical unit trust. Another period of illness prevented Jacob from managing the portfolio himself, as had been envisaged.

However, at that time, some Quaker directors on the board of Friends' Provident Life Office were growing increasingly concerned about how money should be invested. They learned of Jacob's work, and in 1983 offered to manage an ethical fund with investment criteria determined by a separate committee. In 1984 the fund was finally launched under the name `Stewardship'-- chosen by Jacob as a reference to the right use of money in the Biblical parable of the talents. The fund's format was identical to that rejected by the Board of Trade ten years earlier.

Jacob became a founder member of the Stewardship Fund's Committee of Reference. Its experts use both positive and negative tests when they research a company. For example they would approve a company that:

* has excellent products and services

* has good customer relations

* has strong community involvement

* conserves energy or natural resources and they would reject a company that:

* harms the environment

* exploits animals unnecessarily

* trades with oppressive regimes

* produces pornography, weapons, tobacco or alcohol.

Some companies, such as banks and insurance companies, are ruled out because they hold so many shares in other companies which would not necessarily be selected against ethical criteria.

`The restrictions suggested to some observers at the outset that the ethical fund would underperform less restricted trusts,' says Jacob. Yet, according to independent figures from Micropal, the Stewardship Unit Trust has beaten 68 per cent of all UK equity growth unit trusts during its first 11 years. Here, Jacob is quick to give `the smokers' warning'--a good track record does not automatically mean that a fund will continue to do as well in future.

Another surprise was the rate of investment. Early estimates were that the fund would attract between [pounds sterling]2.5 and [pounds sterling]5 million, whereas the figure is now over [pounds sterling]600 million.

Others were quick to follow the initiative and there is now [pounds sterling]1 billion invested in 39 ethical or environmental funds in the UK run by 28 different management groups. Their investment criteria vary, some concentrating on `green' issues and others on such factors as not supporting armament manufacturers or breweries.

Despite `spurious' claims to the contrary, `the movement as a whole has performed remarkably well,' maintains Jacob.

Investment advisers Holden Meehan, who produce An independent guide to ethical and green investment funds, accept that some people may be happy to tolerate a belowaverage return on their investments for the sake of funding a particular endeavour or cause. But they argue in their 1994 report that what attracts most people to ethical investment is the idea of `profit with principle... the desire to bring about some sort of positive change in the world--a quiet revolution through the unlikely medium of capitalism'. An above-average performance `is not only desirable, it's also readily achievable'.

This is a sentiment that Tessa Tennant, Head of Global Care Research at the pension and investment company, NPI, would agree with.

She cites research by the Washingtonbased Investor Responsibility Research Centre together with Vanderbilt University that shows that companies' environmental records correlate well with their investment returns.

`Our inspiration is sustainable development,' she explains. `If we don't look after the planet it won't look after us.' Launched in 1991, NPI's Global Care funds total some [pounds sterling]30 million.

Tennant explains that they back industries (such as recycling, pollution control, healthcare and social banks) which offer solutions to environmental and social problems. They also encourage companies to address environmental and social issues.

She is convinced that environmentally responsible companies can offer a good longterm investment. 7.7 per cent of the Global Care Unit Trust fund is in `water management'. `Over 1 billion people in the world do not have ready access to piped water and over 1.7 billion have inadequate sanitation facilities. Water management has to be a growth industry,' argues Foresight, the Global Care Team's newsletter.

The Social Affairs Unit, a think-tank, recently issued a report, What has ethical investment to do with ethics? One of its authors says that `ethical investment simplistically divides products and industries into good and bad, whereas ethics is about careful judgements on what people do with products'.

In response, Jacob concedes that no company is perfect but argues that `it must make sense to invest in those companies which do more good than bad'. He also claims that the think-tank has failed to research its subject adequately and has been misleading in several of its conclusions.

The Anglican Church Commissioners take a `pro-active' approach to the ethics of investment, according to Antony Hardy, who manages their [pounds sterling]1 billion's worth of stocks and shares.

He explains that his priority is to maximize the return on Commissioners' assets `so that we can support our beneficiaries--essentially clergy in areas of greatest need--within ethical guidelines established by the Commissioners' Assets Committee'.

Although Hardy is prepared to disinvest in a company that adopts a policy which is deemed unethical (as when BSkyB started broadcasting programmes with pornographic content), he prefers to raise concerns with the company directly. Companies usually take him seriously, he claims. `We can punch above our shareholder weight.'

Hardy says that the Commissioners are `trying to establish principles about the conduct of business, not trying to get drawn into single issues'.

He takes as an example the long-standing controversy over the marketing of baby milk. In Third World countries poor mothers have sometimes been given free baby milk in clinics by companies who want to develop their market. The mothers can then be `hooked' on powdered milk, which can be more expensive and less hygienic than breast milk. They may even over-dilute the powder to save money. `Over the years, a set of rules for the distribution and marketing of these products has been broadly agreed within each country,' says Hardy. `My responsibility, by being invested in Nestle, is to ensure that they are marketing the products within those guidelines.'

Now 75, Charles Jacob is still active, despite health problems. He wryly recalls how the doctors wrote him off prematurely at the age of 48. He quotes the Chinese proverb, `It is not how old you are but how you are old.'

He believes that ethical investment is increasingly gaining influence both with investors and the corporate sector but adds, `While some companies have already changed their policies in order to conform with the needs of the environment and to obtain a more acceptable image, there is still a long way to go.'