Ethics Newsline®

The subprime crisis continues to reverberate; ethical investments grow in popularity, but a recent study suggests you should look under the hood before signing up for a fund

VARIOUS DATELINES
The junction of finance and ethics was the locale for a variety of reports last week. Among the stories:

• The New York Times reports that the Bush administration and Congress are trying to come to a compromise on legislation relating to one of the year’s biggest financial-ethics dilemmas: whether to bail out homeowners who find themselves underwater in the wake of rising loan rates and declining home values. About 10 percent of homeowners, owe more on their homes than the property is worth — a figure unmatched since the Depression — the Times reports. While the administration has declared it will not bail out homeowners or banks who behaved irresponsibly, reinforcing what is known in economics as the “moral hazard” of rewarding risky behavior, the fact that current efforts to slow the housing collapse are stalled means that Washington will be forced to explore new ideas, according to the Times. Among the ideas now back on the table is a federal mortgage guarantee for troubled buyers.
• Some credit card companies are raising rates — virtually doubling them in some instances — for customers with good repayment records. The McClatchy News Service reports that industry analysts speculate that credit card companies, squeezed by economic factors related to the subprime crisis, are taking advantage of the fact that card rates can be hiked based on what a company calls “external factors” related to credit ratings but not directly tied to payment records for the individual card. An industry spokesperson interviewed by McClatchy said rate hikes are business as usual and actually benefit other consumers with superior credit ratings.
• So-called ethical investments are becoming increasingly popular in the United Kingdom as investors perceive that the ethical vehicles offer lower risk, according to the London-based Banking Times. In an interview posted on the website of the London Stock Exchange, industry analyst Mark Robertson noted, “Increasingly, investors are realizing that the companies that manage environmental, social, and governance issues well tend to be less exposed to risk and thus are potentially more attractive investment propositions, especially in the longer term.”
• MarketWatch.com last week followed up on a story making waves in the ethical-investment world: a study from a London financial advisory firm claiming that some funds that label themselves as ethical and say they invest in companies that support the environment, fair trade, or similar causes actually have less than 1 percent of their total portfolio in such vehicles. MarketWatch “Ethics Monitor” columnist Thomas Kostigen writes: “Unless you examine the underlying holdings of an ethical fund, it seems there is no guarantee that what you are investing in will adhere to your own principles. That’s why it’s important to look under the hood of any ethical investment fund — any investment fund for that matter — and see exactly what you are getting for your money.”
• A separate study shows that demands for ethical funds has risen sharply in the past year, according to the Scotsman. A study by the Co-operative Insurance firm says that of those planning to invest in an Individual Savings Account, an investment arrangement popular in Britain, 85 percent said they would consider an ethical scheme, compared to 67 percent last year. The study also showed that the amount of money under management by ethical funds rose 18 percent in the fourth quarter of 2007.

Sources: McClatchy News Service, Feb. 20 — New York Times, Feb. 22 — Banking Times, Feb. 22 — MarketWatch, Feb. 22 — London Stock Exchange, Feb. 21 — Scotsman, Feb. 11.

For more information, see: Related Newsline Commentary, Feb. 18 — Related Newsline story, Feb. 18 — Related Newsline story, Feb. 11 — Related Newsline story, Jan. 28 — Related Newsline story, Dec. 10, 2007.