By Tom Bergin and Sinead Cruise
LONDON, Jan 20 (Reuters) - Growing anger at aggressive tax avoidance by big business has prompted ethical investors to consider shunning shares in companies that don't pay their fair share of tax.
As governments struggle to balance massive budget deficits caused by the financial crisis, reports that big companies like Apple, Google and Vodafone pay minimal taxes in some big markets have sparked public protests in Europe and the United States.
All the companies criticised say they follow the law, and some argue they owe it to investors to pay as little tax as legally possible. But politicians on both sides of the Atlantic have argued such avoidance is immoral and hauled executives into public hearings to explain their tax affairs.
Tax authorities in France, Germany and Italy have even launched raids on some high-profile companies' offices.
Many investors with a 'socially responsible' mandate say they have long taken account of companies' tax practices when deciding where to invest, but few if any funds have made a point of screening out companies over tax issues, according to more than a dozen industry professionals contacted by Reuters.
That may be about to change.
FTSE Group, which compiles the share indexes that fund managers in the UK, United States and Asia use to build investment portfolios, said it was looking into excluding companies with what it called overly aggressive tax reduction policies from its ethical index group, FTSE4Good.
"Tax is one of the areas which the independent FTSE4Good Policy Committee are considering, among other criteria priorities," a spokeswoman said. FTSE did not say when it would reach its decision.
The FTSE4Good indexes are one of the benchmarks most commonly used by ethical funds to build their portfolios. European funds invested in socially responsible investments totalled 7 trillion euros ($9.30 trillion) at the end of 2011, according to European Sustainable Investment Forum, an ethical investment industry association.
Eleven percent of the $33.3 trillion in assets under professional management in the United States is invested in funds that screen for environmental and ethical factors, according to a 2012 report from the U.S. Forum for Sustainable and Responsible Investment.
HOW TO SPOT OFFENDERS
Jacky Prudhomme and Helena Vines-Fiesta, co-heads of Environmental, Social & Governance research at BNP Paribas Investment Partners, said they were working on a system for screening out companies with inappropriate tax practices. The Paris-based asset manager had 513 billion euros in assets under management as of March 2012.
"We are not at this stage in a position to assess tax strategies in a systematic manner due to lack of underlying data. However, we are starting to examine how we can do this in some sectors," Prudhomme said, but did not say which sectors.
Charity ActionAid, which has campaigned against multinationals shifting profits beyond the reach of tax authorities in developing countries, said it had been working over the past nine months with fund managers who wanted advice on how to encourage companies to pay their fair share of tax.
Tax policy adviser Michael Lewis said the charity planned to publish a guide for investors next month outlining how they could pressure companies on tax. This could, in time, help funds develop a framework.
"It could be quite challenging" to come up with criteria, explain them and apply them consistently, said Ryan Smith, head of corporate governance at Kames Capital, which manages the Kames 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 practices elsewhere. Some investors also consider how far increases in net profit are due to operational improvements, which can be maintained, or to tax management. A robust tax audit could rapidly reverse that kind of profit.
"We always make sure we know what taxes the firms we invest in are paying. If they are paying a low tax rate, chances are it's unsustainable," said Charles Heenan, investment director at British fund management firm Kennox.
In New York, where fund manager Domini Social Investments said it was looking for ways to rank companies on the basis of their tax policies, General Counsel Adam M. Kanzer said there were difficulties.
For one, it could be hard to find stocks to invest in.
"Unfortunately, tax avoidance practices are so widespread it is virtually impossible to exclude companies based on this issue," he said.