By Tom Bergin and Sinead Cruise
LONDON, Jan 20 (Reuters) - Growing anger at aggressive taxavoidance by big business has prompted ethical investors toconsider shunning shares in companies that don't pay their fairshare of tax.
As governments struggle to balance massive budget deficitscaused by the financial crisis, reports that big companies likeApple, Google and Vodafone pay minimaltaxes in some big markets have sparked public protests in Europeand the United States.
All the companies criticised say they follow the law, andsome argue they owe it to investors to pay as little tax aslegally possible. But politicians on both sides of the Atlantichave argued such avoidance is immoral and hauled executives intopublic hearings to explain their tax affairs.
Tax authorities in France, Germany and Italy have evenlaunched raids on some high-profile companies' offices.
Many investors with a 'socially responsible' mandate saythey have long taken account of companies' tax practices whendeciding where to invest, but few if any funds have made a pointof screening out companies over tax issues, according to morethan a dozen industry professionals contacted by Reuters.
That may be about to change.
FTSE Group, which compiles the share indexes that fundmanagers in the UK, United States and Asia use to buildinvestment portfolios, said it was looking into excludingcompanies with what it called overly aggressive tax reductionpolicies from its ethical index group, FTSE4Good.
"Tax is one of the areas which the independent FTSE4GoodPolicy Committee are considering, among other criteriapriorities," a spokeswoman said. FTSE did not say when it wouldreach its decision.
The FTSE4Good indexes are one of the benchmarks mostcommonly used by ethical funds to build their portfolios.European funds invested in socially responsible investmentstotalled 7 trillion euros ($9.30 trillion) at the end of 2011,according to European Sustainable Investment Forum, an ethicalinvestment industry association.
Eleven percent of the $33.3 trillion in assets underprofessional management in the United States is invested infunds that screen for environmental and ethical factors,according to a 2012 report from the U.S. Forum for Sustainableand Responsible Investment.
HOW TO SPOT OFFENDERS
Jacky Prudhomme and Helena Vines-Fiesta, co-heads ofEnvironmental, Social & Governance research at BNP ParibasInvestment Partners, said they were working on a system forscreening out companies with inappropriate tax practices. TheParis-based asset manager had 513 billion euros in assets undermanagement as of March 2012.
"We are not at this stage in a position to assess taxstrategies in a systematic manner due to lack of underlyingdata. However, we are starting to examine how we can do this insome sectors," Prudhomme said, but did not say which sectors.
Charity ActionAid, which has campaigned againstmultinationals shifting profits beyond the reach of taxauthorities in developing countries, said it had been workingover the past nine months with fund managers who wanted adviceon how to encourage companies to pay their fair share of tax.
Tax policy adviser Michael Lewis said the charity planned topublish a guide for investors next month outlining how theycould pressure companies on tax. This could, in time, help fundsdevelop a framework.
"It could be quite challenging" to come up with criteria,explain them and apply them consistently, said Ryan Smith, headof corporate governance at Kames Capital, which manages theKames 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 practiceselsewhere. Some investors also consider how far increases in netprofit are due to operational improvements, which can bemaintained, or to tax management. A robust tax audit couldrapidly reverse that kind of profit.
"We always make sure we know what taxes the firms we investin are paying. If they are paying a low tax rate, chances areit's unsustainable," said Charles Heenan, investment director atBritish fund management firm Kennox.
In New York, where fund manager Domini Social Investmentssaid it was looking for ways to rank companies on the basis oftheir tax policies, General Counsel Adam M. Kanzer said therewere difficulties.
For one, it could be hard to find stocks to invest in.
"Unfortunately, tax avoidance practices are so widespread itis virtually impossible to exclude companies based on thisissue," he said.
Vodafone (VOD)
