Investing with principle: … ethical investment movement in the UK

For A Change, June-July, 1996 by Kenneth Noble

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.