Historical outline and geographical development

The following section takes a closer look at the historical development of ethical investment and examines the current market position within Scandinavia and United States. The link between global issues and ethical awareness are investigated and key statistics are presented.

3.3.1. History

Religious movements were the precursor for what we today know as ethical investments.

Attention towards ethical concerns within business can be observed in Jewish, Christian and Islamic traditions (Renneboog et al. 2008). Ethical investing originating from Islamic tradition is based on teaching from the Koran, where investing in pornography, pork production, gambling and interest based financial institution are avoided. Ethical investing originating from Christian and Jewish tradition is grounded in the theory of avoidance of investments viewed as sinful by the church (Renneboog et al. 2008), this included avoidance of alcohol, tobacco, gambling and pornography. Stocks from these industries have later been labeled as “sin stocks”, because they are perceived as making money from exploiting human weaknesses and frailties and by that mean sinful in religious context (Agnes L. Neher et al. 2016). In 1928, the Pioneer Fund, the first modern mutual fund based on religious screening was founded (Renneboog et al. 2008).

Unlike the ancient ethical investing based on religious tradition, the modern form is to a greater extent based on the varying ethical and social conviction of the individual investor (Renneboog et al. 2008). The modern evolution of business ethics has been developed in parallel to the development of the political, social end economical world. The emergence of sustainability and ethical issues raised awareness during the 1970s, where questions were raised against the Vietnam War. The Pax World Fund was established in 1971, created for investor opposing the Vietnam War. The funds main screen was avoidance of weapon contractors (Renneboog et al. 2008).

In the 1980s the wave of ethical investing gained more attention, as the racist system of apartheid in South Africa became a focal point of protest by social concerned investors. The protests lead to avoidance of companies doing business in or with South Africa including firms with South African subsidiaries (Renneboog et al. 2008).

In the 1990s environmental sustainability got large attention among ethical investors as an implication of the explosion of the nuclear power plant in Chernobyl in 1986 and the enormous oil spill in 1989 from the supertanker Exxon Valdez, who ran aground near Alaska. These

environmental disasters lead to a high awareness of the possible negative consequences industrial development may have on the environment (Hancock 2005, Renneboog et al. 2008).

In 1997 a growing environmental movement raised its concerns toward the climate change, due to the increased emission of greenhouse gases. 37 countries signed the Kyoto Protocol and thereby committed to reduce their outlet of Co2 gasses. Hence, the industries producing the gases leading to increase global warming were considered as unethical.

In later years, corporate scandals, such as the Enron scandal, have dominated the field of ethical investments, leading to greater focus on transparency, governance and sustainability screens.

Knowledge sharing became increasingly important to the investors and in 1995 the UK Social Investment forum (UKSIIF) was established as a counterpart to the US`s social investment forum (USSIF). In connection with the establishment of the UKSIF all British pension funds were encouraged to incorporate ethical and social issues in their investment decisions. This initiative was eventually initiated in 1999 and was followed by the majorities of European countries. This later reform resulted in the founding of the European Social Investment Forum (Eurosif) in 2001.

In line with the expansion of ethical mutual fund in the 1990s several socially responsible indices was established. The first index the Domini 400 Social Index was created in May 1990 in the UK. The index was established to make ethical investing more accessible to the public and the index became highly popular. Due to increased popularity, several responsible indices have been created in the American, European and Scandinavian market. Amongst these are the Dow Jones Sustainability Index in the US and the FTSE4Good in Britain.

The development in the market for ethical investment has grown tremendously since the early 1970s, and the modern form of ethical investing is based on varying personal ethical and social conviction. A positive correlation between current world matters and ethical awareness is observed. A key factor behind the tremendous growth can be tied to the fact that consumers are willing to pay a premium for ethical products that are consistent with their own values (Renneboog et al. 2008).

3.3.2. United States

The modern era of ethical investment evolved in the US during the political climate of the 1970s and has become one of the fastest growing investment industries in the United States. Today more than 1 out 6 American dollars under professional management is invested in the ethical investment universe (Global Sustainable Investment Review 2015). The ethical investment industry has evolved on several aspects and has turned in to a trillion dollar industry.

In the beginning, it was mainly organizations with religious ties that started to screen out companies connected to the so called “sin industries”. Today, the investment practices have shifted towards sustainability, focusing on long-term investment and the generation of positive social impact. In 1984, the forum for Sustainable and Responsible investment (USSIF) was founded. The forum is a US based membership organizations connecting all participants engaging in socially responsible and sustainable investing. The forum has over 400 members and is the biggest organization for ethical concerned investments in the United States.

The forum for Sustainable and Responsible investment published its most recent report on socially responsible investing trends in the end of 2015. Their research found nearly $6,57 trillion under professional management in the United States, making it the biggest player according to asset under management. The official $6,57 trillion total is up from 3,74 trillion in 2012, an increase of 76

% (Voorhes, Hodque Farzana 2015).

There are numerous factors contributing to the tremendous growth in the market of ethical investment. The most prominent is the consumer-driven demand, which have been argued to evolve from better-educated and informed investors (Schueth 2003). In a questioner completed by the US SIF, 80% of 119 US money manager said that they offer ESG products as a response to client demand. Equally as important, is the growing body of evident supporting the notion that investor does not need to sacrifice performance when investing in socially responsible matter. Many investors are therefore realizing that responsibility can walk hand-in-hand with prosperity (Schueth 2003). Another factor contribution to the growth is the high development of new and specialized investment products, as well as the increasing cash inflow into existing ethical investment products.

Two types of ethical investors dominate the American market. The first is the investor that is motivated by his personal values and priorities and is referred to by the media as the “feel good

“investor. Investing their money in a manner closely aligned to their personal values; make them feel better about themselves. The second type of investor wants to support and encourage improvement in quality of life. This investor is highly focused on catalyzing positive changes in the community and is more interested in the social impact the investment have in the United States (Schueth 2003).

As being a pioneer, and leading player within the market of ethical investment, it was a natural choice to include the United States as one of the geographic area of domicile of the funds in this study. Previous studies have thoroughly investigated the American market, and it is therefore interesting to compare those results with the updated results obtained in this study.

3.3.3. Scandinavia

The ethical investment market in Scandinavia comprises the following three countries: Denmark, Norway and Sweden. The practice of ethical investments has strong similarities over the country borders, which is caused by the shared cultural heritage and history of the Scandinavian countries.

The three countries have similar welfare structures built on the solid role of the government and its democratic philosophy. The Scandinavian welfare model is characterized by its strong commitment to labor unions and corporate associations. Corruption levels are low, the education and health system are highly developed and there is a high degree of state involvement. As a result of this homogeneity between the Scandinavian countries, a common approach of ESG integration has developed. The Scandinavian countries have been among the first in the world to introduce regulatory frameworks and standards aimed at promoting environmental, social and governance (ESG) activities in financial management (Sandberg et al. 2008). Strong emphasis is put on transparent procedures by the organizations claimed to be ethical.

The first ethical fund in Scandinavia had religious roots and was established in Sweden in 1965.

The religious foundation was practiced through the exclusion of “sin” industries and manufactures of armaments and firearms. The Swedish church played a significant role in the development of the ethical investment industry in Scandinavia and established several funds based on core Christian and humanitarian values. The expansion and popularity of ethical investment have in later years shifted towards environmental awareness. The interest for ethical

investment has moved to a wide range of both public and private investors. Based on numbers of ethical fund Sweden is the biggest player in the market, followed by Denmark. In terms of asset under management, Norway is the biggest player of the Scandinavian countries. This is mostly due to the presence of the Norwegian Government Pension Fund, which manages the revenues from the Norwegians oil fund ventures. The pension fund is saving for future generations in Norway when the oil eventually runs out. The market value of the fund is today 6 9991 billion NOK³. In 2004 stringent ethical guidelines for the Norwegian government pension fund was adopted. The ethical foundation of the fund is based on three pillars; helping improve standards of corporate governance, exercising our ownership rights responsibly, and monitoring and managing the risk in the fund's investments by addressing a variety of factors⁴.

The reason for including funds with domicile in Scandinavian is due to the limited research previously conducted on this geographical area. The market is also relevant in terms of the diversity amongst the funds. The Scandinavian ethical investment industry is far more developed in comparison with other European countries, which makes it an interesting research target.

3https://www.nbim.no/en/the-fund/

4 https://www.nbim.no/en/responsibility/responsible-investment/