Around twelve years ago the company I was working with held a seminar for clients in Bali. It was part of a world tour by several fund managers who managed a range of funds supported by the company.
One of the managers was showing slides of the various companies whose shares he had selected for his fund. These included British American Tobacco. As soon as he showed that slide a lady in the audience stood up and scolded him for buying shares in a company that was responsible for so much misery and death. She had good reason; her husband had recently died as a result of smoking.
The speaker was dumbstruck; he had no response. This was clearly his first and painful introduction to the concept of ethical investing.
Is ethical investing new?
It has actually been around a long time. In 1832 English Quakers Samuel Tuke and Joseph Rowntree established an insurance and savings mutual, Friends Provident, which would enable the many to provide protection for the unfortunate few who get hit by life-changing events. They introduced a set of core values that would add a new dimension to investing.
So-called ethical funds have also been around for decades but they haven’t exactly gained the star ratings that would attract investors on a large scale. But that could be changing as the business world adapts to the new forces of social media, regulation, class action suits and so on. The field of ethics is no longer reserved for great philanthropists like Bill Gates and Warren Buffett who are directing a good part of their fortunes to causes that will make for a better world.
New challenges are also coming from ‘millennials’ who will not accept the status quo of the way money is made and even ‘baby boomers’ are starting to feel guilty about the state of the world they are leaving to their grandchildren.
Exactly what is ethical investing?
In its simplest form it means avoiding investments in any product that is perceived to be harmful. The list can include the obvious ones such as tobacco, gambling and arms but can be extended to alcohol, oil companies, coal mining, nuclear energy and even obesity-causing fast food companies and manufacturers of sugary drinks. It can also include products like mobile phones that use supply chains that rely on companies with dubious employment practices.
The list is endless and finding an equity fund that avoids all the possibly ‘harmful’ products would be nigh impossible.
One problem is that companies do not fall neatly into ‘good’ or ‘bad’ categories. For example, an oil company may be guilty of depleting the world’s natural resources and polluting the world yet it may be allocating an increasingly large part of its resources to alternative and ‘clean’ sources of energy. If it is not, it is going to be left behind when the world turns its back on fossil fuels.
If an ethical fund decided to exclude all companies associated with alcohol it would be very popular with devout muslims for whom alcohol is ‘haram’ but it would not go down well with investors who enjoy a glass or two of beer or wine.
People will have different views on arms. No-one wants to see their money being used in warfare but countries have a right to defend themselves and have to rely on arms to do so. Buying arms from another country would not make sense.
When ethics conflict with realit
We can all have noble thoughts on where we place our money but we then have to allign those thoughts with the reality of financial returns and other social considerations.
For example, smoking is clearly a major health problem in Indonesia with millions of lives cut short each year through the habit. But were the government to ban smoking overnight, apart from causing a revolution in the streets it would lose a huge amount of tax revenue and it would also cause the loss of hundreds of thousands of jobs. So any shift from smoking would require a long educational process as well as ensuring that new jobs were created.
Very recently President Trump was faced with an ethical dilemma. In face of the alleged murder of a journalist in the Saudi Arabian consulate in Turkey he promised severe action against Saudi should the allegations prove correct. But he said he would not cancel the multi-billion arms deal he had agreed with the Saudis, citing the argument that the deal would mean jobs for Americans and also that the business would otherwise go to Russia or China. If you were in his shoes what action would you take?
Positive ethical investing
Apart from eliminating ‘unsuitable’ products, another way to invest is to seek out funds that invest only in assets which play a positive role in protecting and enhancing the environment. Examples would be funds like BlackRock or Guinness Alternative Energy funds or the Shroder Climate Change fund that invests in companies such as those developing electric cars. More and more institutions such as pension funds and also fund managers are now putting pressure on companies to declare their commitment to ethical or ‘sustainable’ investing.
A word of caution. Where there are new trends there are also potential dangers so ‘caveat emptor’ still applies. Around ten years ago the ‘green’ theme became very popular and our industry was drawn into a number of environmentally friendly ‘sustainable’ forestry products such as bamboo, agarwood and jatropha plants, the processed fruits of which have proved able to replace jet fuel. But many of these ventures failed, basically due to lack of proper governance, a critical factor, not just for ethical investing but for all kinds of investments and companies.
Environmental, Social and Governance (ESG)
Poor governance was deemed responsible for safety problems at BP some years ago as well as the emissions scandal at Volkswagon. So the pressure is now on all companies to ensure that the culture of a company takes its leadership from the top, and that the executives are made fully accountable when things go wrong. The same goes for big banks after years of sanctions for wrongdoing including money-laundering and interest rate manipulation.
The terms ‘ethical investing’ and sustainable investing are now rapidly being replaced by the letters ESG, standing for environmental, social and governance.
There will always be conflicts between practicalities and doing the right thing. Let’s face it, if we have a choice between investing in an ethical fund that is making a 2% annual return and a conventional fund that is making 10% few of us would opt for the ethical fund. But the good news is that improved governance and awareness of the way the world is going is leading to a situation where sustainable or ethical funds are now competing on level terms and have good prospects of outperforming funds whose managers are focused only on profit and show no interest in making the world a better place.
Do watch out for the term ESG. We are likely to see a lot more of it!
Colin Bloodworth, Chartered Member of the Chartered Institute for Securities and Investment (UK), has spent over 20 years in Indonesia. He is based in Jakarta but visits Bali regularly. If you have any questions on this article or related topics you can contact him at : firstname.lastname@example.org or +62 21 2598 5087.
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Copyright © 2018 Colin Bloodworth