Be an investing angel

Adopting a high-minded outlook while buying stakes in profit-hungry corporations may strike some as an exercise in cognitive dissonance. Public companies are under constant pressure from shareholders to drive down costs and grow their earnings and dividends, which may come at the expense of employees or stem from unethical, or even illegal, behaviour.

There's a long list of unapologetic offenders. McDonald's (US:MCD) and Walmart (US:WMT) are constantly criticised for underpaying their workers and even encouraging them to seek government assistance - effectively passing the tab to taxpayers. Coca-Cola (US: KO) aggressively markets its soft drinks at teenagers and poor and vulnerable populations to foster life-long loyalty. SeaWorld's (US:SEAS) shares have slumped a third since last summer, when a documentary revealed its ill-treatment of its killer whales. Trinity Mirror (TNI) is facing around 50 legal claims after it admitted hacking into people's phones in search of scoops. And environmental disasters such as the Exxon Valdez or BP's (BP) Gulf oil spill have had devastating consequences.

Tarring companies with the same brush is unwise, though, as there are certainly shades of grey. For instance, much-maligned Walmart is building money centres in its stores where shoppers can cash cheques, pay bills and set up cheap checking accounts. No detailed screening is required beyond proof of identity - a boon to those that lack a credit history. Walmart isn't being altruistic - it's tightening its grip on consumers and gaining access to more financial data. But nonetheless its centres should help the 15 per cent of households in major US cities that lack checking or savings accounts, and the many more that struggle to manage their finances.

Aim-listed OMG (OMG) also blurs the lines. Its motion capture technology can be used to create video games or analyse a golf swing. But defence companies utilise its aerial imaging software to track enemy movements, while major hospitals use its products to get an inside view during operations. Moreover, Alzheimer's sufferers can wear its automatic camera, Revue, to track their daily routines and improve their memory.

It's hard to label such businesses as "good" or "bad". Perhaps it's up to the likes of Bernard Madoff and Enron to misbehave so that others can appear principled. Even so, "One of the dimensions in which a company can differentiate itself is by being more ethical," said PayPal co-founder Peter Thiel at a recent event.

Fortunately for investors, there are a few ethical gems to be found. Coloured gemstone producer Gemfields' (GEM) goals "transcend the bottom line" to include worker safety and sustainable mining. For instance, its underground shaft mines minimise the amount of energy and earth removal needed to extract its flagship emeralds. And it sponsors schools, farming co-operatives and other community projects near its operations in Zambia and Mozambique. Ultima Networks (UTN) also looks squeaky clean - it invests in solar energy and makes the Infineum and Powacycle electric bikes.

Making a healthy profit

Healthcare may be an obvious first stop for ethical investors, but the companies that support the industry are also worth a look. A quarter of US hospitals use Craneware's (CRW) software to accurately price and charge for their supplies and services. That helps them wring every dollar from their budgets and operate more efficiently, benefiting their patients. Craneware also owns miCheckin, which lets doctors communicate with patients before, during and after treatment. A values-driven investor might find both services appealing, but the group's shares trade at 23 times forecast earnings, suggesting there's limited value on offer.

Another option is Emis (EMIS), which tackles healthcare "silos" by enabling hospitals, GPs and pharmacies to communicate and share information. That can shave a minute or two off appointments, says chief executive Chris Spencer, meaning "an extra patient will be seen if you get your skates on".

The group's "connected care" software proved its worth in London's Camden, where it was used to co-ordinate primary, secondary and social care for elderly patients. The result was around a 50 per cent reduction in both emergency bed days and accidents, and a third fewer appointments with outpatients. Moreover, Emis plans to let people book GP appointments, order repeat prescriptions and access their case files through its patient.co.uk website.

Other players include Ideagen (IDEA), which digitises and manages medical records to reduce costly mistakes and delays, and Ultrasis (ULT), which helps people to manage their own health through "Beating the Blues", an online depression treatment programme, as well as mobile fitness apps. Meanwhile, Premaitha Health (NIPT) is using DNA analysis to diagnose health issues and also offers prenatal screening tests.

Two other companies have made a killing by saving lives. Advanced Computer Software's (ASW) Adastra system helps 1,500 community care organisations across Europe, Australasia and the Middle East to organise prescriptions and referrals and record patient progress. And Servelec's (SERV) software automates bookings and records patient data for several mental and community health groups. Moreover, it can provide managers with a map of staff and patients and "red flag" any problems. And its Rio mobile technology allows care workers to access vital data when they visit patients' homes.

Servelec's other business, automation, also has positive impacts. It provides the controls needed to shut off malfunctioning oil rigs and alert staff to gas leaks or fires. Those are in high demand after disasters such as Fukushima and Deepwater Horizon, which highlighted the widespread use of outdated technology.

Cashing in on finance and learning

More than 2.5bn people worldwide lack access to banking and payments infrastructure. Payments group eServGlobal (ESG) addresses that problem by letting people use their mobile phones to pay bills and transfer money. Furthermore, it has teamed up with MasterCard and wholesale telecoms specialist BICS to launch HomeSend, a global money transfer platform that allows consumers to send money from their phones, payment cards and bank accounts. The group also plans to expand into other areas of mobile microfinance, such as insurance, savings and loans.

Earthport (EPO) has zeroed in on remittance flows to developing countries, which are expected to top $436bn this year. Its platform connects directly to countries' banking systems to let them send and receive cross-border, low-value payments. That has made it cheaper and easier to remit funds that don't only benefit their direct recipients - they flow into the local economy and are a valuable source of foreign exchange.

Other aspects of global finance are also being transformed. For instance, Australia's securities regulator uses First Derivatives' (FDP) software to monitor market activity and combat insider trading and other misdeeds, creating a fairer playing field for investors.

Ethical investors should also consider companies that supply educational materials or equipment. Promethean World (PRW) makes interactive whiteboards and provides personalised learning and training. It also runs Promethean Planet, a website where thousands of educators gather to share information and advice. Similarly, RM Education (RM) provides software, services and digital testing to UK schools - a marked transition from its legacy PC supply business that has sent its shares up 42 per cent since our buy advice in November. Tribal (TRB), which provides student management software, inspections and surveys to improve education, is another buy tip with strong prospects.

Ringing in returns

The telecoms industry is dominated by large companies with deep pockets, and looks set to consolidate further as providers diversify into mobile, TV and broadband and struggle to meet surging data demand. That sounds like a recipe for malevolent monopolies, but telecoms companies can be a force for good. Satellite specialist Avanti Communications (AVN) targets sub-Saharan Africa - a fast-developing region home to 1bn people with only 16 per cent internet penetration. Avanti currently provides broadband, voice and data support to telecom providers in Kenya, Zimbabwe and a broad swathe of east Africa. Its unusual focus helped it to double its revenues for the year ended 30 June, and its prospects remain hard to pin down - once its fleet of five satellites approaches full capacity, management thinks the business could generate $700m in sales and $500m in cash profits, up from $66m and $1.7m at present.

Satellite group Inmarsat (ISAT) also "flattens out social and economic imbalances", says chief executive Rupert Pearce, by connecting far-flung parts of the planet. Its communication technology supports local commerce, education and healthcare, helping developing nations to cross the "digital divide". And earlier this year Inmarsat was lauded for its efforts in tracking down Malaysia Airlines flight MH370, although the aircraft is yet to be found. The group now plans to launch a free global airline tracking service over its network.

Telecoms play a critical role in the event of an earthquake, fire or other disaster, as they're needed to organise first responders and rescue efforts, as well as to transmit images and video from the scene to TV screens worldwide. But catastrophes can present opportunities for the likes of Ubisense (UBI), which combines mapping and operational data for manufacturers, utilities and telecom providers. It was helping a New York cable TV provider roll out its new network in late 2012 when Superstorm Sandy struck, leaving half its clients' customers without service. The pair used Ubisense's myWorld software to create a dashboard view of the entire service area, overlaying customer complaints and outages on maps of the network and the city. That enabled staff to scope out specific areas, direct recovery efforts and even share their intelligence with New York's utility companies.

The dark side of business

For every business that acts as a surprising force for good, there are others that aren’t quite the angels they’re cracked up to be. A quixotic view of the press, for example, is that it illuminates wrongdoing, champions the public interest and keeps the powerful in check. But modern media is better known for spinning facts, serving as government mouthpieces and violating people’s privacy. Examples have come thick and fast – Trinity Mirror currently faces around 50 phone-hacking claims as well as an investigation into the Sunday Mirror’s entrapment of an MP, while the News of the World was shut down after its phone-hacking scandal.

Marketers are also under intense scrutiny for violations of privacy. As people equip their homes, cars and even bodies with connected devices, advertisers have gained access to valuable personal information regarding health, habits, moods and location, giving them more ways to engage – or bombard – consumers than ever before. Even driving skill is under the microscope – Quindell’s (QPP) ‘black box’ technology analyses people’s steering and speed to help insurers adjust their premiums. It would argue that this provides a societal good, reducing accidents and making driving more affordable for conscientious young drivers – but as with other location-based services and social media networks, some are increasingly troubled that their every move can be tracked.

An ethical concern of the future is whom such data is shared with – conspiracy theorists even suggest Facebook, for example, was set up by the CIA as a cheap way to keep an eye on US citizens. It may sound far-fetched, but it’s a good illustration of a growing privacy concern.

Technology companies aren’t innocent of more old-fashioned dodgy dealings, either. Investor Peter Thiel described cab-hailing firm Uber as the most “ethically challenged” business in California’s Silicon Valley – it’s been suggested that Uber has ordered its employees to book then cancel rides with Lyft, a rival backed by Mr Thiel, to waste its time, and to recruit Lyft drivers from their back seat.

Others might suggest Uber has plenty of competition in the valley for that title. Take Google (GOOG), for example – its motto may be “don’t be evil”, but more than 20 companies, including Microsoft, have lodged complaints with regulators about Google’s power and its transition from a search engine to an information provider. Google claims it has helped publishers to generate new audiences and grow their digital revenues, but News Corp and numerous other publishers are howling about its indexing of content and manipulation of search rankings.

Google is an example of how technology companies can have a tendency to display monopolistic characteristics – even if, unlike traditional monopolies, they don’t abuse their position to force prices higher. In Google’s case it has built its position by doing something new and hard to copy. Monopolies can also afford to behave ethically if they’re not struggling to stay afloat.

Whether the same can be said of e-commerce giant Amazon (US: AMZN) is another matter. True, it offers customers a huge range of low-priced merchandise, convenient ordering and rapid shipping (a not dissimilar claim to social good that supermarkets once made). But it’s also been accused of avoiding tax bills, bullying suppliers and cutting prices to force rivals out of business only to increase them later. Some may say that’s just business – but the role of business in society is something any investor of an ethical persuasion needs to pay attention to.

IC VIEW: Stock-picking can be an exercise in minesweeping, and trying to turn a profit while satisfying one’s conscience only increases the risk of getting blown up. Still, for those of a moral bent, we have tipped several stocks that strike us as ethical – Earthport, eServGlobal, RM and Tribal – and remain bullish on Gemfields and Ideagen. TM

Pharma: Good cop, bad cop

For those investors seeking out ethical investments, the pharmaceutical and biotechnology industries present quite the dichotomy. This year, the World Health Organisation (WHO) stated 68 per cent of global deaths are caused by four main non-communicable diseases: cancer, cardiovascular disease, diabetes and chronic respiratory diseases. Suddenly, it's not difficult to understand why big pharma has narrowed its focus to these specific fields in the past decade or so. And on the surface, it's a comfortable feeling to know investing in GlaxoSmithKline (GSK) or AstraZeneca (AZN) helps develop drugs you might be forced to rely on one day. But the WHO also said 80 per cent of patients with these illnesses could have prevented such problems simply through a healthy lifestyle. No drugs necessary. Now it's questionable what we're really investing in. What's more, most of these conditions go largely untreated in the developing world. So are the big drug conglomerates as altruistic as they'd have us believe?

Bad pharma

This isn't a new question. British physician and academic Ben Goldacre wrote his book Bad Pharma in 2012, examining the relationship the drug giants have with the medical profession and how they control the academic research into their own products. Mr Goldacre argued "the whole edifice of medicine is broken" because the evidence from which drugs are developed is distorted by industry players themselves. He said pharma companies finance most of the clinical trials into their own products, they withhold negative data which could threaten a future drug's development and trials are often conducted on small numbers of subjects, which are not representative of true patient populations. He also criticises big pharma's funding of doctors' education and cited academic papers which may have been planned or ghost written by pharmaceutical companies without any disclosure. In reaction, the Association of the British Pharmaceutical Industry (the UK trade body for pharmaceutical companies) argued that the examples in the book were historical, and that therefore Mr Goldacre's concerns had already been addressed. Ultimately, the industry is among the most regulated in the world, and international standards do exist to monitor the disclosure of trial data.

Couple these claims with GSK's latest bribery scandal, however, and the dark side of big pharma starts to emerge. GSK was fined a record £297m in China this year after authorities said executives used bribery to boost sales of its products in the country. The court case sent a clear message to other global pharma behemoths looking to do business in China: President Xi Jinping's anti-corruption drive has a zero-tolerance policy. The 15-month-long investigation started to weigh on GSK's share price at the start of 2014 and it has failed to regain much momentum. Admittedly a string of poor results and a profit warning in July have hardly helped. But when news of the fine broke, the share price actually rose 1 per cent. It doesn't sound like much, but investors clearly feared the outcome would be worse.

Accessing the problem

So, like many industries, pharmaceuticals' track record isn't squeaky clean. The future will inevitably play host to more scandal, but in the meantime a more pressing concern is the accessibility and cost of effective treatments - particularly for the world's poorest nations and in the field of oncology.

Cancer drugs are highly profitable, and that provides the industry with a clear incentive to fund research in the field. It's estimated that nearly a quarter of research and development (R&D) budgets go towards future cancer drugs. In fact, GSK sold its oncology business to Swiss rival Novartis (NOV) in an 'asset swap' deal this year because it believed the division's product portfolio was 'substandard' to those already heading to the market. Instead, GSK wants to make a fresh start, and has sought out new partnerships with small biotechnology groups at the forefront of the latest oncology research and technology.

First, access to effective treatments for serious diseases is a financial quagmire in the developed world. In 2010, David Cameron set up the Cancer Drugs Fund to pay for medicines considered to be too expensive by the Department of Health and NHS. But just four years after its inception the fund is facing financial problems, having overspent its £200m annual budget. Panicking, the government recently upped the budget to £280m and said it will increase scrutiny of new drugs for cost effectiveness. It's also likely to de-list some products it currently pays for.

Part of the problem is cost relative to efficacy. Sanofi's (SAN) colorectal cancer product Zaltrap costs $11,000 per patient, per month. But it has proven no more effective than Roche's (ROG) Avastin, which is cheaper. As doctors stopped prescribing Zaltrap - particularly in the lucrative US market - Sanofi dropped the price. Clearly, this is the crux of the problem - big pharma's greed for profit.

But if prices are shocking in the Western world, the story is even darker for the developing nations. Cancer is prevalent all over the world, and once the poorest countries have tackled malnutrition, poor water sanitation and diabetes, cancer is sure to be their most expensive challenge yet. The pharma industry's approach has concentrated on high-price, low-volume business targeting small groups of wealthy individuals in poorer nations who are able to pay out of pocket. But by comparison, Swiss group Novartis has tried to buck the trend through its patient assistance programmes in several countries, including India. This is where it operates its largest oncology patient access program - the Glivec International Patient Assistance Program (GIPAP) - which helps patients with two rare cancers (including chronic myeloid leukaemia) receive treatment.

But critics, including charity groups such as Médecins Sans Frontières, say programmes like this don't provide a large-scale or sustainable solution. Instead, some civil society groups have gone as far as trying to overturn intellectual property rights in poorer countries to stimulate the development of cheap drug copies by generic manufacturers. Ultimately, it's not just the cost of the treatment that worries these charities. In the developing world, the cost of travel to hospitals, the lack of education and a dearth of medical specialists all pose significant problems.

Not all created equal

Neville White, head of sustainability and responsible investment (SRI) research at Ecclesiastical, reminds us that "big pharma is not equal". While he admits GSK's corruption scandal in China is hardly good PR, he argues that many of the drug giants are taking greater steps to work with trusted non-governmental organisations (NGOs), for example Unicef, to help distribute their products in areas that need it, but struggle to find or finance it. This is particularly applicable, he says, with companies trying to establish operations in war-torn states. And Mr White is certain philanthropic efforts will eventually work in big pharma's favour. Hostile governments will come around, he says, and appreciate that the big companies have stuck around through good times and bad.

Mr White also explained that it's not a 'cut-and-dried' approach when investing in sectors with multiple examples of corruption or misconduct. It's why plenty of fund managers have to apply a 'best in class' principle when evaluating various equities for investment. A negative screen will eliminate many of the 'vice' industries (tobacco and gambling for instance) off the bat, but Mr White is adamant this approach can overlook some worthy investments. For every company conducting large-scale research and attempting to penetrate unstable markets with new and expensive products, there are small, perhaps Aim-listed, companies at the forefront of the latest technology and innovation. This doesn't just apply to the pharmaceuticals sector, either. In fact, Mr White uses the transport industry as a key example. For every major airline guzzling fossil fuels and proliferating pollution and carbon footprints, there are smaller companies developing clean energy technologies that could change the environmental future of the aviation and automotive industries. It's not fair, therefore, to write off a sector as an 'unethical' investment simply because the behemoths have set a bad example.

So, on that basis, is pharma as an industry all bad? The answer is, obviously not. But the key is understanding how to seek out those investments worthy of ethical investors' attention.

Where's the return?

Big pharma is big business and it's not alone in how it validates its investment case. Like many industries hit by scandal or unethical practice, it often declares significant dividends to entice risk-averse investors. This is welcomed by investors looking to earn regular income from their portfolio, but for those more conscience-bound investors, it poses a problem.

GlaxoSmithKline shares consistently yield close to 5 per cent. This is attractive compared with most of its sector peers. But given its recent bribery scandal, ethical investors might be forced to compromise in order to take advantage of this stable income-earner. Mr White at Ecclesiastical disagrees. He says GSK's sustainability and responsibility report is "more than 200 pages long" and that the ethical investment case must always "match up" with the investment case. This means finding a middle ground - an ethical investment that still earns the investor a return. After all, plenty of ethical funds, including the Henderson Global Care UK Income fund, have stakes in both GSK and AstraZeneca. It's becoming clear that big pharma is trying to clean up its side of the street where it can and Mr White said his business tries to engage with the conglomerates to encourage this.

But ethical investors might worry that 'ethical' investments don't drive the best financial return. That said, it has been estimated that the top-performing ethical funds have rewarded investors with gains of 40-50 per cent over the past three to four years, compared with just half that from funds that tracked the FTSE 100 over the same period. But some experts in the SRI field say that misses the point altogether. The 'opportunity' derived from ethical investments is almost always less quantifiable than traditional metrics used by generalist fund managers.

In fact, research body Which? said in a survey it conducted in February and March 2010 that 42 per cent of investors would accept "a slightly lower rate of return" if they knew the provider was "investing ethically", indicating many consumers are "keen to take a more socially responsible approach to investing". But in October 2013, investment firm Tilney Bestinvest contradicted this. It said the £8.6bn in various "green and socially responsible funds" represented just 1.2 per cent of the total sum under management, and that figure had not grown compared with the previous year.

Where to invest?

Instead, Jessica Alsford, head of Morgan Stanley's SRI research team in Europe, identifies key global trends or 'sustainability themes' - some of which apply to the healthcare sector - which could help shape investors' decisions on where to invest for their ethically-minded clients.

In healthcare, Morgan Stanley's top 'trends' include the prevalence of obesity and ageing populations, and it cites multiple companies that are directly involved in these themes. These companies either develop products or offer services to combat these problems or they could be affected by changing policy in these fields. Ms Alsford admits that predicting how companies could be affected is difficult. The obesity problem in Mexico offers a good example. The government there has taken "quite a radical approach" to the epidemic, she says, including high taxes on certain consumer goods and foods. She warns that similar changes in jurisdictions closer to home could cause issues for consumer-facing companies.

A stock associated with concerns over obesity is US diet company Weight Watchers International (US:WTW). The core philosophy behind Weight Watchers programs is to use a "science-driven approach" to help participants lose weight by "forming helpful habits, eating smarter, getting more exercise and providing support". Its foundations also hinge on what it calls "positive reinforcement" for its participants. But does that make it an ethical investment?

There are obvious criticisms here. Weight Watchers is a program participants have to pay to be a part of. It's run primarily in western countries in which people diet for vanity more often than health. The company also makes no mention of tackling the obesity crisis, and investors might guess the problem lies more with the food producers than diet companies. If this is really the problem, investing in promoters of healthy eating, such as US company Whole Foods Market (US:WFM) might be labelled the more 'ethical' choice.

Here's the test

A major concern for ethical investors buying into healthcare stocks is animal testing. In fact, fund managers can use negative screens to weed it out entirely. But it's arguable that a nuanced approach is sometimes better on this issue. For example, animal testing in the development of cosmetics is different to the testing of compounds that could develop into a transformative treatment for cancer. T Colin Campbell, the prominent American biochemist who specialises in the effect of nutrition on long-term health, wrote in his book The China Study that while he sympathised with the public's concerns about animal testing, there is no alternative method for understanding the nature of disease and the efficacy of future treatments without endangering our own species. For investors in life sciences, the animal testing issue has to be weighed against the potential benefit. This is where the 'opportunity' is less quantifiable - once again - and ethically-minded investors will have to decide for themselves which issue outweighs the other.

Charity vs good business

Moreover, the definition of an ethical investment in the healthcare sector has more to do with access to medications in developing nations. A clear example of a company trying to improve upon this problem is Omega Diagnostics (OMG). While big pharma, like Novartis, can take on the mantle of philanthropy, Omega has built treating the world's poorer nations into its business model. The story revolves around its VISITECT CD4 treatment for HIV. It's a disposable test for the detection of CD4 T-cell levels (CD4 cells are ones which the HIV infection targets). Towards the end of an HIV infection the number of functional CD4+ T cells falls, which leads to the symptomatic stage of infection known as the acquired immunodeficiency syndrome (Aids).

Omega's test uses a finger-prick blood sample and produces a visual result in 40 minutes. This means patients could receive life-saving treatment before even leaving the clinic. Minimal training is required and no additional instruments are necessary, eliminating the need for sophisticated equipment, expensive reagents and highly trained personnel. This makes it highly appropriate for use in some of the world's poorest countries - where the disease is rife and often left untreated. According to UNAIDS, the Joint UN Programme on HIV/Aids, there are 15m people who should be getting access to treatment for the disease, but they can't find an affordable CD4 test in their communities.

Aid agencies and charities will no doubt welcome the development of such a test. To date, more than 60 patient samples have been run in India and a 200-patient sample evaluation has just been run in Kenya. CD4 is now well on its way to full market commercialisation, at which point it could significantly alter the way in which HIV is diagnosed and treated in the third world.

There are multiple ways in which ethical investors can invest happily in healthcare and evidence of good corporate governance is always reassuring. The industry's issues - some of which we've highlighted - will always be present. But seeking out companies looking to improve access to medications and funding philanthropic efforts are the best ways by traditionally ethical standards. HR