George Carter, Nikko Asset Management NZ managing director, reflects on the meaning and spirit of ‘ethical investing’ in an age where the labels can often be misleading
“That man is richest who … has the widest helpful influence, both personal and by means of his possessions, over the lives of others” Unto this Last, John Ruskin (1860)
How, where and with whom do you invest your money? How do you act as a good custodian of the assets/possessions you have control over?
The first time I invested in a managed fund was when I took out my first mortgage in the UK. I took an interest-only mortgage and decided that by investing the capital repayments into a fund I’d do better over the next 25 years than just paying down my principal amount.
So I searched around a bit and I found the Legal & General Ethical Fund. It was an equity fund which could invest into UK companies, subject to an ethical screen. I didn’t agree with all the different screens, and also wished some other screens could be added – but I was content enough as I decided that it was better to at least do something which showed that ethics and morality were important than simply ignoring them altogether when it came to investments.
Over the years that I invested in that fund, and subsequently, I’ve continued my inward debate “How should I invest my money so that it behaves the way I personally want to behave and live? How do my investments reflect my values? And is that even possible?”
For those family offices with large accounts (ie tens or hundreds of millions of dollars), it is of course possible to have mandates tailored around your precise desires and preferences, but for the vast majority of us this isn’t an option – we have to invest in pooled funds. As I look at the ethically screened pooled funds available, I’m increasingly frustrated at the screening process and that nearly 20 years after I made my first ‘ethical investment’, that crude screening process is still largely unchanged.
What has improved, however, is the awareness of Environmental, Social & Governance (ESG) considerations, and that the adoption of these features in investment processes is becoming increasingly mainstream. One positive aspect of this is the increasing recognition that short-term profit maximisation is not necessarily the best approach for either asset owners or consumers; but rather that by considering ESG factors it is possible to make better investment decisions – ie it’s an enhancement to the investment process itself.
There are though some negative aspects which we shouldn’t ignore, and these include:
- That many people fail to understand that whilst ESG is at the heart of the UN’s Principles of Responsible Investing, this is not about screening, banning or otherwise boycotting companies or activities you disagree with. ESG is about ensuring that an investment process captures all relevant and pertinent information in order to make better investment decisions; and
- There are a minority of investors and activists who are using ESG as a means to dictate to the wider investment community what they believe are ‘good’ or ‘bad’ characteristics and so seeking to enforce their subjective ethical or moral views on others.
Like my younger self, I still want the financial industry to acknowledge and act in a way that is fair, moderate and appropriate; to consider wider non-financial issues in decision making, and to engage with companies to improve behaviour and promote good actions. Unlike my younger self, I’m not sure that simple screening that often fails to properly reflect my values and ideas is the way forward. My sense of unease, or even dare I say hypocrisy, at applying rules to my funds that I don’t want to apply in my own life has increased over the years. Below are a few topics on which I share my personal and subjective views:
- Alcohol is often excluded from ethical funds. I enjoy drinking wine and beer; I’m also partial to the odd whisky and brandy. I would be very disappointed if all vineyards, breweries and distilleries were shut down. However, I really dislike the active promotion of RTDs (ready to drinks) to teens. So, if I was wealthy enough to be able to dictate my own investment mandates, I would happily allow investment in alcohol producers and suppliers, but I would avoid any company that had a poor record of supplying alcohol to minors, or who had a product range which was implicitly targeting binge drinking and sweetened alcohol for underage teens. This is where ESG is far more effective than ‘ethical’ investing, for under ESG a manager isn’t slavishly forced to not own good companies that happen to operate in a particular sector, but they can apply criteria to ensure that they are behaving and operating in an appropriate way.
- Armaments. Perhaps more controversial, but again, I have a preference that my army is well-resourced to defend and protect my country from aggressors. I’d like to know that our allies are similarly well-equipped. Whilst it would be wonderful to live a world where no military presence or force is required, the reality is that it would be ridiculous to disarm all friendly military forces. However, I do not want to invest in companies that create weapons that do not comply with internationally agreed protocols, or have such poor governance that weapons and systems are able to easily find their way into the hands of terrorists and militia groups. Again, ESG enables such a distinction, whereas simple ‘screening’ does not.
- Possibly more controversial is the topic of fossil fuels and pollution more generally. Which companies should be banned on ethical grounds? Those who extract fossil fuels? Those who transport them? Those who use them? All the above? If so, then to be consistent I should not purchase a car, should not fly on a plane, should not purchase imported goods which have been transported by ship or air. Again, a simple screen is naively simplistic. I enjoy my cars, visiting friends and family overseas, and having imported goods. However, I also want to live in a world which isn’t polluted and dirty. So what gives? Companies who operate with good environmental policies, who seek to minimise their pollution, who operate efficiently with scarce resources – these should all be eligible for investing in. Again, ESG enables us to make nuanced investment decisions rather than blanket bans.
- As a final example, I want to consider social media. Speaking as someone who doesn’t have a facebook account, has never tweeted and can’t even describe snapchat, I am perhaps not the right person to comment. However, I do note the harm and suffering that has occurred through social media. The bullying, the harassment, the endless ridicule that is ever present and can’t be escaped from even within the security of your own house. And yet, I have never seen any ‘ethical’ fund seek to screen social media companies. Just as alcohol and gambling are banned by many due to the social harm that can come from such things, then perhaps social media should be banned too? But again, the better response is to consider the ESG principles and bring such companies to account for the way in which they are complicit in such use of their tools, and encourage them to do more to help prevent the negative consequences from those who seek to cause pain and hurt via their systems.
I’ve come to realise that I don’t want an ‘Ethical’ or ‘Socially Responsible’ fund with inflexible rules and blanket bans. But I consider myself an ethical and responsible person. I like to think that I want the best for my family and my society – so how could I not want to invest ethically or socially? Like many things in life, things aren’t black and white and emotive terms and phrases make for poor debate.
Choosing not to invest in an ethical or responsible fund doesn’t make me unethical or any less caring about the world in which we live. Instead, I now try to find out more about the people who are managing the funds I invest in – do I like their philosophy?
Do I like the way they think about companies? Can I find out how they vote at board meetings, and would I have voted the same way? Are they people who seek outcomes for investors and businesses that I agree with?
These are not always easy questions to find answers to, and I’m unlikely to agree with all the answers I do get, but it’s in these answers that I will get comfort that my money is being managed in a way which is as consistent with my lifestyle and attitudes as possible, and in so doing hopefully I can have the widest helpful influence, both personal and by means of my possessions, over the lives of others as possible.