London - Growing anger at aggressive tax avoidance by big
business has prompted ethical investors to consider shunning shares in
companies that don't pay their fair share of tax.
As governments struggle to balance massive budget deficits
caused by the financial crisis, reports that big companies like Apple, Google
and Vodafone pay minimal taxes in some big markets have sparked public protests
in Europe and the United States.
All the companies criticised say they follow the law, and
some argue they owe it to investors to pay as little tax as legally possible.
But politicians on both sides of the Atlantic have argued such avoidance is
immoral and hauled executives into public hearings to explain their tax
Tax authorities in France, Germany and Italy have even
launched raids on some high-profile companies' offices.
Many investors with a 'socially responsible' mandate say
they have long taken account of companies' tax practices when deciding where to
invest, but few if any funds have made a point of screening out companies over
tax issues, according to more than a dozen industry professionals contacted by
That may be about to change.
FTSE Group, which compiles the share indexes that fund
managers in the UK, United States and Asia use to build investment portfolios,
said it was looking into excluding companies with what it called overly aggressive
tax reduction policies from its ethical index group, FTSE4Good.
"Tax is one of the areas which the independent
FTSE4Good Policy Committee are considering, among other criteria
priorities," a spokesperson said. FTSE did not say when it would reach its
The FTSE4Good indexes are one of the benchmarks most
commonly used by ethical funds to build their portfolios. European funds
invested in socially responsible investments totalled €7 trillion at the end of
2011, according to European Sustainable Investment Forum, an ethical investment
Eleven percent of the $33.3 trillion in assets under
professional management in the United States is invested in funds that screen
for environmental and ethical factors, according to a 2012 report from the US
Forum for Sustainable and Responsible Investment.
How to spot offenders
Jacky Prudhomme and Helena Vines-Fiesta, co-heads of
Environmental, Social & Governance research at BNP Paribas Investment
Partners, said they were working on a system for screening out companies with
inappropriate tax practices. The Paris-based asset manager had €513bn in assets
under management as of March 2012.
"We are not at this stage in a position to assess tax
strategies in a systematic manner due to lack of underlying data. However, we
are starting to examine how we can do this in some sectors," Prudhomme
said, but did not say which sectors.
Charity ActionAid, which has campaigned against
multinationals shifting profits beyond the reach of tax authorities in
developing countries, said it had been working over the past nine months with
fund managers who wanted advice on how to encourage companies to pay their fair
share of tax.
Tax policy adviser Michael Lewis said the charity planned to
publish a guide for investors next month outlining how they could pressure
companies on tax. This could, in time, help funds develop a framework.
"It could be quite challenging" to come up with
criteria, explain them and apply them consistently, said Ryan Smith, head of
corporate governance at Kames Capital, which manages the Kames Ethical Equity
and Kames Ethical Cautious Managed funds.
Lewis said ActionAid had been approached by mainstream
funds saying aggressive tax planning may
point to risky practices elsewhere. Some investors also consider how far
increases in net profit are due to operational improvements, which can be
maintained, or to tax management. A robust tax audit could rapidly reverse that
kind of profit.
"We always make sure we know what taxes the firms we
invest in are paying. If they are paying a low tax rate, chances are it's
unsustainable," said Charles Heenan, investment director at British fund
management firm Kennox.
In New York, where fund manager Domini Social Investments
said it was looking for ways to rank companies on the basis of their tax
policies, General Counsel Adam M. Kanzer said there were difficulties.
For one, it could be hard to find stocks to invest in.
"Unfortunately, tax avoidance practices are so
widespread it is virtually impossible to exclude companies based on this
issue," he said.