If you want to invest ethically and still gain exposure to emerging markets, you have a few choices.
Investigate the handful of ethical emerging markets funds. In addition to Calvert, two other fund companies—Timothy Plan and Epiphany—have introduced emerging markets SRI funds. Because the funds are so new, it's not yet clear how much following your conscience in emerging markets will cost you in terms of returns. The Timothy Plan Emerging Markets A is down 1 percent this year, and the Epiphany FFV Latin America A, which has a narrower geographic focus, has lost 10 percent this year.
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Maitland, Fla.–based Timothy Plan invests with filters aligned with a Christian worldview of evangelical pastors, according to its website. Irving, Texas–based Epiphany also takes a faith-based approach.
Morningstar identified two other funds as having a socially responsible bent: the DFA Emerging Markets Social Core Equity Fund, the first-of-its-kind, and the American Century NT Emerging Markets Institutional Fund. The latter filters out tobacco stocks (NT stands for No Tobacco). Dimensional Fund Advisors' portfolio has a five-year return of 16 percent, according to Morningstar, which also claims the iShares MSCI Emerging Markets ETF is up 13 percent in the past five years.
Freeman said Calvert Emerging Markets Equity A, managed by London-based portfolio manager Hermes Investment Management and sold through advisors, looks both for companies making a positive impact in emerging markets, such as those adopting fair labor practices, and filters out companies making a negative impact, such as big polluters. "Increasingly, Calvert is a broad church that fills its pews with worshipers at both altars," said Freeman.
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Consider stock picking. You might buy a broad index–based traditional emerging markets fund and then set aside some money for what's known as impact investing—buying into companies that support a cause you care about.
The 100 global companies perceived to be socially responsible, ranked by the New York City–based Reputation Institute, could be a good place to start. But be warned that this kind of research is incredibly complex. Take, for instance, the question of investments in real estate in India. Investing in real estate could be seen as a profitable and socially responsible investment because it is spurring economic development in India. But developers there, particularly in hot property markets, are often in direct conflict with local residents for scarce water, and some are tapping into precious groundwater. On top of that, how will you get the real story of a particular company's behavior or impact?
"In emerging markets, the societal checks and balances to keep companies honest may be fewer [than in developing markets]," Loic Dujardin, director of research products for Amsterdam-based research firm Sustainalytics, wrote in an email. "However, investors have begun to rely on several non-company information sources—e.g., NGOs or local media. This provides a fuller and multi-stakeholder perspective of the company and moderates the company's own message and information."
Use an outside-the-box option. Some of Cogswell's clients buy notes from the Bethesda-based Calvert Foundation, a spin-off of the investment company. The foundation makes loans to microfinance organizations and packages them as investments that have a fixed term, usually ranging from one to five years, and a fixed interest rate comparable to what investors would get from a CD. Withdrawals prior to term are subject to tight restrictions, and the money and the return aren't guaranteed, though "they've never lost a penny of investors' money," Cogswell said.
If you want some exposure to emerging markets in your portfolio but your emphasis is on the ethics, this approach might work for you.
—By Elizabeth MacBride, Special to CNBC.com