# Sample of assignment: Socially Responsible Investment (SRI) (full text)

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List of figures:

Figure 1 Raw return of 1 dollar in the market and SRI portfolio………………………7

Figure 2 Environmental Kuznets Curve ……………………………………………..10

Figure 3 The model of external and internal model of environmental accounting…..12

Figure 4 Managerial perspective of environmental accounting ………………..……12

Question 1

A.

1. Current ratio

 Current ratio = Current Assets  Current liabilities Woodland Ltd   \$179,100  \$72,000 = 2.49 : 1 Burbank Ltd   \$185,220  \$75,600 = 2.45 : 1

2. Quick Ratio

 Quick Ratio = (Cash + Short-Term Investment + Receivables (Net) ) Current liabilities Woodland Ltd   (\$18,000 + 0 + \$86,400)  72,000 =1.45 : 1 Burbank Ltd   (\$20,160 + 0 + \$89,460)  75,600 =1.45 : 1

3. Inventory turnover

 Inventory turnover = Cost of Goods sold  Average Inventory Woodland Ltd   \$435,400 ((\$67,500 + \$72,900) 2) = 6.20 times Burbank Ltd   \$448,580 ((\$64,260 + \$71,820) 2) = 6.59 times

4. Average collection period (Receivables Turnover)

 Receivables Turnover = Net Credit Sales  Average Net Receivables Average collection period = 365  Receivables Turnover Woodland Ltd   \$650,000 ((\$79,200 + \$86,400) 2) = 7.85 times 365  7.85 = 46.50 days Burbank Ltd   \$673,920 ((\$83,160 + \$89,460) 2) = 7.808 times 365  7.808 = 46.75 days

After comparing the four ratios in the above table, I supposed that Woodland Ltd has the better short-term credit risk. In term current ratio, Woodland over perform Burbank but with very little lead (2.49 versus 2.45). And they even have the same quick ratio which is \$1.45 per 1\$ liability. Similar ratios are also found in inventory turnover and average collection period for receivables. So Woodland and Burbank both have low short-term credit risk and Woodland is a little better than Burbank to be exact as demonstrated by the ratios above.

B.

1. Rate of return on total assets

 Return on Assets = Net Income  Average Assets Woodland Ltd   \$46,980 ((\$459,000+\$477,000) 2) = 10.04% Burbank Ltd   \$39,780 ((\$521,640 + \$536,760) 2) = 7.52%

2. Rate of return on equity

 Return on equity = Net Income  Average Common Stockholders’ Equity Woodland Ltd   \$46,980  \$297,000 = 15.82% Burbank Ltd   \$39,780  \$ 335,160 = 11.87%

From the above two ratios I suppose that Woodland is the better investment company. With Woodland’s lead in term of rate of return on total assets with 10.04% compared to Burbank’s 7.52%, Woodland is showing better usages of assets in generating net income. And in term of return on equity, Woodland also outperform Burbank with 15.82% than Burbank’s 11.87% which means that Woodland also better use stockholder’s equity in its business to increase the net income. So Woodland would be a better choice for investment purpose.

C.  What other analysis may be carried out to help in decision making?

Two other ratio analysis could be used in helping the decision making about which bank to invest. The first the profitability ratios which can be used to evaluate the company’s ability to generate revenue against to costs employed. Profitability ratios usually be calculated through gross profit margin and net profit margin. Take the gross profit margin as an example (Gross profit margin=gross profit/turnover*100%), the gross profit the remains of sales revenue after the deduction of cost of sales. The gross profit margin calculation is very simple, but is useful in accessing the profitability of the a company.

The second ratio analysis is about the gearing ratio. The gearing ratio of a company could be calculated by this formula: Gearing=Long term liabilities/Equity shareholders’ funds. The gearing ratio accesses the percentage that the company’s total capital that is borrowed in a long term perspective. On one hand, if the gearing ratio is too high then there is a high long term credit risk; but on the other hand, if the gearing is too low then it would not be a healthy trend because the usage of long term liability also represents the company’s ability to borrow money to generate profit for the shareholders. The appropriate level of gearing need to be referred to the industrial average and the historical date of the company and other competitors.

Question 2

## 1.1    A List of stakeholders in unethical investment

Stakeholders refer to the groups who have a stake in the actions of the corporation (Freeman & Reed 1983), which could be understood as the parties that are either influencing or influenced by the business practices of the corporation. In case a cancer research organization owns shares in a tobacco company, the possible stakeholders are listed below:

Shareholders of the investment source party, i.e. the shareholders of the British cancer research organization in this case, are probably the most beneficiaries in such a contradicting investment provided that the investment in the tobacco company will generate higher return to their investment. Other than the economy interests, such unethical investment will also bring bad reputation to the shareholders and they will also face social critics if such unethical investment will be exposed to the public.

The management team of the cancer research organization will also have a stake in such investment relations as they are to plan, executive and control the organizational activities in such a manner that could ensure that the company will achieve its short term and long term goals. So to keep the company running in an ethical way to adhere to its corporate social responsibility (CSR) is also considered as a kind of responsibility of the management team of the organization.

Employees could also be the stakeholders in this case because they may be asked to do their research work in the direction that will not generate the research result that proves to discourage the sales of the tobacco products. And what’s more their reputation will also get harmed if the case will be known by their families and the local communities.

Customers of the research organization will also be the stakeholders under such circumstances as they are the ones that purchase the research and study results from the research organization about the knowledge of cancer, if the result would be bias that will reduced the detrimental influences of the chemicals found in tobacco, then the customers, mostly corporate consumers will be mislead.

The local communities and the society will also be the stakeholders especially the smokers who consume tobacco regularly. Their health may be influenced by the increasing smokers in term of growing smoking diseases and death because the harm of smoking has been downplayed by the research results of the cancer research organizations.

Question 2

Ethical share holding could be considered as a kind of Socially Responsible Investment (SRI), which is defined as the application of social screens in the financial decision makings (March, Gregory & Kugel 2009), usually includes passive investment and active investment. Active investment focus on contributing to the social good while passive SRI tend to exclude unethical investments in the industries such as tobacco, weapons manufacturing. In general understandings, unethical shares tend to outperform the market average while the SRI tend to underperform the market average in term of rate of return. A statistical research demonstrates that unethical shares such as tobacco have a higher rate of return by 9.1% than the market average (Hong & Kacperczyk 2005). Another performance and style analysis of investment performance base on 1990 to 2008 also corresponds with this conclusion as shown in the figure below.

Figure 1.0 Raw return of 1 dollar in the market and SRI portfolio (source: March, Gregory & Kugel 2009)

During the sample period which starts from 1990 to 2008, the SRI at most times generated a lower return rate than the average market level. But speaking in the separate economy terms, when the economy is on the raise, SRIs grow slower than the market while decline less in time of economy recession which makes the return rate differences between SRI and market average diminish. After taking into the influence of risks which tend to less for SRI, SRI could be considered as outperforming the market average even in a return orientated perspective.

According to the analysis above, taking into the consideration of other social benefits together with the SRI, in my personal opinion, a lower return rate by 18.2% (double of the difference between unethical share return rate and the market average) than the unethical stocks (sin stocks), could be accepted in term of economy booming, ethical shares will still be my only chooses of investment. What’s more the lower risk taking and a long term investment perspective which characterize the SRI are also the reasons why SRI could be more attractive

C

Superannuation is a saving scheme contributed usually by employers, governments and employees which is becoming more and more popular in a world wide scale in term of pension funds. The superannuation fund will be invested by trustees in a lot of different types of assets and financial products. According to my personal life experiences, my friends and myself would not put too much of attention on the fields that the superannuation will be invest in. But a market research on the UK public on the usage of pension funds shows that 77% of the people likes to have their pension funds investing in a socially responsible manner if the SRI offers the similar return rates (Targett 2000). And another study found out that 80% UK pension scheme participants require their pension investment schemes to follow an SRI policy (The Ethical Investor 1999). Similar SRI awareness increases are also found in other developed countries such as Australia (sees also Kerr & Zubeevich 2002). But such increasing awareness does not exist from the very beginning for most developed countries, it takes a long period for the government and the public the get the realized the importance of such issue. So in my opinion, for Asian’s current situations, most employees did not know how the superannuation funds will be invested nor to show their care on the SRI topic. But the increasing trend of SRI requirement of pension funds should be witnessed with the fast rising of the Asian economy according to the developed countries’ experience.

We should not take a lack of care on the SRI requirement of superannuation as unethical behavior behaviors for those around us. Take China as an example in which there isn’t a specified policy or law like “The Financial Services Reform Act 2001” in Australia which regulates the financial product providers to disclose product selection information under the requirement of social, environmental and ethical considerations (Kerr & Zubeevich 2002), employees even do not have the convenient channel and rights to access to the usages of their pension funds which makes the lack of awareness on this issue more understandable and forgivable if such indifference would be characterized as unethical behaviors. But just like the old Chinese saying goes, “No blames to those do not know (what they have done is a sin)”, behaviors could be defined as unethical with two necessary conditions: the fact of unconformity with the approved standard and awareness of the harm of the behaviors. So for those around us who do not show enough of awareness to the SRI requirement of their pension funds, we would not consider their indifference as unethical.

# 2.        Question 3 (20 marks)

With the ongoing industrialization process, the environmental issues have increasing concern in a worldwide scales marked in particular with the increasing number of Non-Governmental Organizations (NGOs) that pursue an ideal green world. But our modern business world came along and so far still in many fields contributing to the generation of the pollutants. The environmental Kuznets curve (Figure 2.0) may provide an appropriate rational to the necessity of pollutions which stem from the application of Kuznets curve (Kuznets 1955) in the environmental issues.

Figure 2 Environmental Kuznets Curve (Source: Socialist.wordpress.com 2007)

As shown in the figure above, according to the environmental Kuznets curve, the level of environmental degradation such as pollutants and deforestations increase increases with the process of the industrialization and after the per capital income has reached a certain, the degradation declines with the continuation of economy development. The environmental Kuznets curve has corresponded with the dilemmas that most developing countries have been experiencing and environment improvements that developed economies have today. The factor that will seems to be increasing all the time is the per capital income which measures the income level against the capital employed. And the increase of the production efficiency will be a driving force that lead to a decline of environmental degradation and a environmental friendly business environment after some point.

So that in the case that I will be employed by Bonza Resources Ltd, a mining for mineral country, that focuses its monetary and other resources in its budget majorly in the cost control, marketing its environmental image and lobbying politicians to grant mining rights in national parks, I would agree that the company is actually not in consistent with its stated position on environmental issues based on the descriptive facts above but I would not hold a absolute negative attitude towards the company’s budget plan.

Firstly, provided that the minerals’ price will be relatively stable the focus on cost cont minimization will be an effective approach to advance towards the environmental Kuznets curve. Thinking about this, if the company would import the most advanced technology and equipments which tend to be in high cost, then it will leads to the decreases of the company’s competitiveness and even trigger the issue of going concern, then the such effort to protect environment while mining would become meaningless.

Secondly, it is not advisable for the Bonza Resource Ltd to inject a large amount of resources into the marketing of the company’s environmental images that the company does not show corresponding efforts in constructing. When insufficient resources has been allocated to the substantial environment protection effort, the company may find it necessary to fraud its annual report in a manner showing the fruit of environmental protection and once the lie starts, it take thousand of consequent lies to cover up the original one which is the similar path that lead to the bankruptcy of many companies. It’s the long term interest for all the stakeholders to reallocate such budgetary resources back to the environmental protection efforts.

As a staff that hired to promote environmental approach to mining for minerals, I would take the following tactics to try to reconcile the dichotomy of cost control and environmentally friendly business.

Figure 3 The model of external and internal model of environmental accounting

(source:Env.go.jp 2000)

Figure 4 Managerial perspective of environmental accounting(source:Env.go.jp 2000)

Firstly, I will focus on developing an environmental accounting system. An environmental account is proved to be an effective information for external understanding of how the company is approaching to the mining for minerals in an environmentally friendly way. Through the external function of environmental accounting, targets such as stock stabilization could be achieved. And speaking internally, environmental accounting system helps the management to measure the environmental costs and promote effectiveness and efficiency of environmental investments in the business.

Secondly, I will try to persuade the management team to reallocate part of the budgetary resources allocated marketing the company’s environmental image to the substantial environmental investment such as more clean mining technology, reviving and regenerating old mine site that will help reinforce cost control and lead to the increase of the profitability of the company.
Reference

Env.go.jp 2000, Japanese Ministry of the Environment, Developing an Environmental Accounting System (Year 2000 Report), accessed on 19th Sep 2010, [online] available: www.env.go.jp/policy/kaikei/report00e.pdf

Freeman, R. E. & Reed, D. L. 1983, Stockholders and Stakeholders: A new perspective on Corporate Governance. California Management Review, Spring83, Vol. 25 Issue 3, p88-106

Hong & Kacperczyk 2005, The price of sin: the effect of social norms of markets, Working Paper, Princeton University

Kuznets, S., 1955, Economic growth and income inequality, American Economy Review, 49:1-28

Kerr, M. & Zubeevich, K. 2002, Where is your superannuation money going? An environmental perspective, accessed on 18th Sep 2010 [online], available: http://www.asria.org/news/press/lib/ACFSuperFinalReport.pdf

March, S., Gregory, K. & Kugel, K. 2009, Socially Responsible Investment: A Performance & Style Analysis of Socially Responsible Mutual Funds, accessed on 18th Sep 2010 [online] available: http://www.stephenmarsh.com/resume/SRI.pdf

Socialist.wordpress.com 2007, The neo-Malthusians and the Kuznets Curve, accessed on 19th Sep 2010, [online] available: http://socialist.wordpress.com/2007/10/03/the-neo-malthusians-and-the-kuznets-curve

Targett, K. 2000, SRI gets a boost from local authority plans, Pensions Week, Vol. June, p1

The Ethical Investor 1999, New standard helps investors make choices, EIRIS, Vol. Jan, p1