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Saturday, Nov. 4, 2000
ACCOUNTABILITY PAYS OFF FOR SRI FUNDS
Socially, eco-correct firms make sense to investors
By TOMOKO OTAKE
Should businesses try to raise environmental awareness, respect women's right to work and encourage volunteerism?
Sure. But can it be lucrative?
While capital markets here have yet to fully address the question, a new investment style is challenging critics who say these concepts do not mix with profitability.
In August 1999, Nikko Asset Management Co. marketed a new type of investment trust. Its biggest selling point: stocks and bonds were selected not just for their business performance but also for environmental performance.
Named eco-fund -- which stands for both ecological and economical -- the investment trust has gained popularity, especially among women with no previous investment experience.
Since then, four other investment trusts with similar concepts have started up. Total assets of the five funds now stand at 156.6 billion yen.
Rewarding good corporate behavior through investment -- known as socially responsible investment, or SRI -- is a well-established concept in the United States and Europe. It is now spreading from environmentalists to the corporate world in Japan.
In September, Asahi Life Asset Management Co. developed a new investment trust that screens businesses and selects its portfolio based on environmental initiatives as well as hiring of women, the elderly and the disabled. Response to consumer feedback and contributions to local communities are also evaluated.
Last week, a mutual aid organization comprising teachers and school officials in Tokyo announced that, from December, it will put 1 billion yen into a tailor-made fund investing in environment-friendly firms.
The Mutual Aid Association for Tokyo Metropolitan Teachers and Officials said it will eventually expand its investment to cover firms promoting education-related philanthropy, such as those funding scholarships and cultural events.
Under SRI, firms are screened for investment portfolios based on certain criteria -- be it environmental awareness, ethical hiring practices or corporate citizenship.
SRI, which topped $2 trillion at the end of last year and accounted for 13 percent of all assets under professional management in the U.S., has pressured firms to act ethically and responsibly, said Mizue Tsukushi, president of The Good Bankers asset management firm, who persuaded the teachers' group to invest in the fund.
"In the U.S., institutional investors such as pension funds have given SRI a big push," said Tsukushi, who also serves as a consultant for two eco-funds in Japan. "The mutual aid society's investment is small in scale but profound in that it has paved the way for the nation's other institutional investors to become involved."
While social investing is still in its infancy here, some experts say its potential for growth has never been greater.
Kenichi Umemoto, general manager of the investment trust department at ALAMCO, said that corporate scandals in the past several months -- the food-poisoning fiasco at Snow Brand Milk Products Co. and the customer complaint coverup by Mitsubishi Motors Corp. -- will motivate more investors to place social viability ahead of corporate performance when investing.
But even Umemoto concedes that SRI remains a hard concept to sell. His firm's SRI initiative was saddled with problems after it was hatched last November, nearly killing the project, he said.
For instance, his firm had difficulty finding a think tank willing to undertake the corporate screening work. All but one of the institutes his firm approached -- Mitsubishi Research Institute -- showed reluctance toward rating corporations, for fear that it would undermine their relationships with clients, he said.
Umemoto was also painstaking in his checking of employment and other ethical policies of his own company and its parent -- Asahi Mutual Life Insurance Co.
"To market a fund that touts social awareness is to declare to society that we also take a stand on these issues," he said. "As long as we sell the idea of social responsibility, we must be compliant with it."
Ranking firms whose operations span a variety of business sectors through a uniform evaluation was a headache for Sachiko Kishimoto, executive director at the Center for Public Resources Development. The nonprofit organization undertook part of the research for selecting the ALAMCO fund's portfolio.
Her group sent questionnaires to 700 companies screened by ALAMCO, asking questions regarding their social correctness. "It was very difficult," she recalled. "How do you evaluate community involvement by Internet companies, which have no branches, or manufacturers that have moved their factories overseas?"
Most importantly, SRI will not be widely accepted in Japan unless it performs well. In the U.S., a study has shown that an index monitoring the price of socially invested stocks has continued to equal or exceed that of the S&P 500, a major stock index.
In the year or so since their introduction, Japan's eco-funds have remained near par, after a relatively good initial showing. Amid a series of market downturns since spring, four of the five funds are barely retaining around 95 percent of their original price.
This market climate, as well as the risk of losing principal, is one factor putting institutional investors off SRI.
The Japanese Trade Union Confederation (Rengo), the nation's largest labor group with 8 million members, started to consider purchasing eco-funds in February 1999.
But it shelved the idea, faced with strong opposition from some of its member organizations that regard anything with "fund" in its name too risky as an investment vehicle, said Yutaka Ito, an official at Rengo's social policy bureau.
Critics also charge that social-responsibility funds -- so far as their portfolios go -- are no different from high-tech funds, questioning how much emphasis is actually put on the environment. Some industry people say telecom stocks such as NTT DoCoMo were recently played up to improve the sagging performance of eco-funds.
Iwao Taka, a professor of business ethics at Reitaku University, disagrees. He said firms with palpably problematic practices -- such as nonbank moneylender Nichiei Co., whose heavy-handed loan-collection tactics came under strong public criticism -- would be excluded from SRI funds no matter how profitable they might be.
Umemoto of ALAMCO is crossing his fingers that the upcoming introduction of the 401(k)-style portable pension scheme in Japan will work in favor of SRI funds, including his.
Currently, many investors are obsessed with short-term gains and tend to switch products if their funds are affected by market whims, he said.
But with the arrival of the 401(k) scheme, under which workers will be responsible for making investment choices, people will start looking for long-term investment vehicles, he said. SRI is a safer choice because companies taking measures to fulfill their social responsibility will, in the long run, avoid the danger of a share-price plummet caused by a scandal or lawsuit, he maintained.
Neither are other financial institutions just sitting back. Hideo Utsuki, an official with the teachers' mutual aid society, said his office received numerous inquiries from asset managers and brokerages the day after the group announced it would invest in the tailor-made fund.
"Nobody said our decision was noble or respectable," Utsuki said. "But everyone wanted to know how they might turn this (new investment style) into a lucrative business."