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Does Fair Trade equal a fair return?

FINANCE: SOCIALLY RESPONSIBLE INVESTING

Paul Allen is the author of Your Ethical Business: How to plan, start and succeed in a company with a conscience.

Fair Trade has been a rapidly growing phenomenon over recent years and many businesses are keen invest in it. Paul Allen discovers the different aspects of ethical investing and asks whether Fair Trade businesses make for better investments

In less than a decade, the term "Fair Trade" has gone from near obscurity to unprecedented recognition. As an independent consumer label that guarantees disadvantaged producers in the developing world a better deal, it has resulted in a record boom in ethical spending. And many of the world's biggest retailers, including Starbucks and Tesco, are embracing fairly-traded ranges with gusto.
 
As we increasingly consider the impact of our consumer spending, we are also looking at investments to deliver social, not just financial rewards. Thanks in part to the mainstream success of the Fair Trade movement, ethical investment in the UK is now also hitting the headlines.

Changing times
Ten years ago, less than £1.5 billion was invested in environmental or socially responsible funds. Since then, our concerns over climate change and poverty in the developing world have led to a major change in investor attitudes. According to Ethical Investment Research Services (EIRIS), investment in "green" funds is expected to exceed £7 billion for the very first time in 2007.

In 2005, Fair Trade sales amounted to approximately €1.1 billion worldwide, a 37% year-on-year increase. As of December 2005, 508 certified producer organisations in 58 developing countries were Fairtrade certified. That represents more than one million producers and five million people benefiting directly from Fair Trade. In the US, the market is worth €344 million, while in the UK, consumers' appetite for all things Fair Trade is worth over £200 million and growing by around 50% every year.

Given this unprecedented growth, it seems there has never been a better time for investors to put their money into the world's most famous ethical kitemark. Nevertheless, there are a few potential hurdles for Fair Trade to overcome.

Level of ethics
The first is that the Fairtrade kitemark applies only to products – not to companies. So if you're keen on supporting Fair Trade, what is actually important is the business's depth of commitment. Drinks giant Nestlé, which sells one Fairtrade coffee among its 8,500 products, is clearly not a "Fair Trade business".

Confusingly, a green business may sell a range of ethical goods, some accredited by Fairtrade, others by different kitemarks, such as the Rainforest Alliance, the Soil Association or the Forestry Stewardship Council. Each accreditation guarantees a different set of minimum ethical criteria.

For ethically-minded investors who don't have time to investigate all these possibilities, Fair Trade can be a useful catch-all approach to SRI. But to understand whether it truly is the pinnacle of ethical investment, you first need to examine what the twin crescent logo actually stands for.

Fair Trade guarantees its producers two main things: a minimum price, which covers the cost of production and amounts to a living wage; and a premium, which is designated for social and economic development in the producer communities. The farmers and workers themselves decide how these funds are spent.
 
Beyond price, Fair Trade also prohibits child and slave labour, and ensures growers have a safe workplace, the right to unionise, and an adherence to the United Nations charter of human rights. It also guarantees the protection and conservation of the growers' environment, and promotes long-term business relationships between them and sellers.

This all appears – and indeed is – beneficial for growers who are usually otherwise at the mercy of unfair international markets. But the principle of Fair Trade is not without criticism. Some analysts argue that this price "distortion" is misguided and actually encourages market inefficiencies and overproduction. Others say the minimum price is far too low, and when global coffee prices rise there will be little difference between Fair Trade and the open market.

The Fairtrade kitemark does not represent every ethical concern either. Fair Trade, for example, is not the same as organic. Nor does it say very much about the carbon footprint of the companies involved in the supply chain. Although it addresses some environmental issues, it is built principally on social and trade justice. Other ethical kitemarks have arguably much better eco credentials.

In all likelihood, however, this will not trouble the average ethical investor. After all, Fair Trade is likely to be just one of the ventures your money supports if you decide to invest ethically. That's because there are only a few share-issuing companies who sell exclusively Fairtrade-accredited goods – and can therefore be called "Fair Trade businesses".
 
That said, companies committed to Fair Trade have certainly never been more profitable or popular. When Fair Trade coffee company Cafédirect launched its ground-breaking share issue in 2004, for example, it had to turn investors away. The UK's sixth largest coffee brand raised its £5 million target in less than four months.

Today, Cafédirect has 4,500 shareholders, who expect both social and financial returns. In 2006, they received a dividend of 2p per share. This year, there will be no financial dividend, only a social return to the grower communities.

"Our shareholders recognise that 60% of our profits are put back into the producer communities," says Helen Ireland, corporate communications manager at Cafédirect. "But they understand about social and financial returns. They know they are buying into a unique business model."

Nevertheless, Ireland insists that investment in Fair Trade is not simply a feel-good gesture. "If you looking at the growth of Fair Trade and think about where you want to put your money, it's clearly a good proposition in its own right," she says. "It's just a different way of doing business."
 
In the US, the Fair Trade co-operative Equal Exchange has more than 300 external shareholders. Each has invested a minimum of $5,000 and receives an annual dividend targeted at 5%. These investors don't have voting rights, but there are other perks: in 2004, for example, Equal Exchange took five investors to a farming community in El Salvador to see what their money has helped to achieve.

Sustainability
Despite these success stories, pitching your investment into just one ethically-minded company can be risky – especially as the current boom in green investment has been compared to the dotcom bubble by some analysts. For example, with the world's governments still struggling to agree on a solution to the planet's future energy needs, it is hard to predict how green power companies will fare in the future.

However, Fair Trade looks a relatively safer bet because its growth is arguably not as fragile as that of certain green energy sectors, which may fall out of favour – think about the current furore surrounding the feasibility of producing biofuel on a global scale. By comparison, the continuing popularity of Fair Trade, and its increasing adoption by mainstream retailers, indicates a less risky proposition.

It is as yet impossible to measure the impact of Fair Trade within the wider successes of SRI. However, as the most visible and recognisable mark of our increasing desire for more ethical, sustainable lifestyles, it is undoubtedly a contributing factor. The Fairtrade kitemark may not be the nirvana of the green movement, but it is providing solid financial and social returns for record numbers of people, both investors and growers. Crucially, it has also tied many important global issues to a successful business model – and for that, Fair Trade remains a good investment in every sense of the word.

fairtrade, sri, Philanthropy, Investment
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