Ethical Performance
inside intelligence for responsible business


ethics screening moves into derivatives field

December 2004

The rapidly-expanding credit derivatives market now has its own ethical index.

The Ecpi-Credix ethical index is composed of 125 credit derivatives whose underlying assets have satisfied 200 social, environmental and ethical criteria set by E.Capital Partners, the Milan-based independent financial advisory firm that has created it.

Credit derivatives are financial instruments which allow users to manage their exposure to the risk of a creditor failing to repay a loan. E.Capital applies its ethical screens to the companies from which the credit risk ultimately derives. SRI funds offering fixed income products will be able to use the index to identify suitable investments and benchmark performance. E.Capital also hopes to attract banks, asset managers, pension funds and other mainstream investors who wish to minimize the risk of investment grade defaults.

It claims that ‘very few’ of the companies to have defaulted since 2000 were in its investing universe. Of the 21 that were, 15 would have been avoided by investors who applied its ethical criteria, which are based on observance of United Nations and ILO core conventions and on intelligence gathered from pressure groups.

E.Capital said that among the companies excluded were Enron, Parmalat, Railtrack and WorldCom ‘as they did not respect the ethical and social criteria applied. The ethical screening allowed investors to avoid the significant losses caused by these defaults.’

In the case of Parmalat, which defaulted in December 2003, E.Capital says that its ethical screens identified the Italian food company as a risk because it lacked ‘accounting transparency’ and had poor environmental and social performance, with no policy for energy and water saving.

The latest available social accounts ‘dated back to 2001, therefore making it impossible to compare the performance and judge the situation as a whole for the following year,’ it found.

E.Capital also plans to launch the first ethical collateralized debt obligation this month. A CDO bundles portfolios of bonds, loans or credit derivatives, enabling investors to manage risk in the corporate credit market.

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