Ethical investing is good for business
Environmental, social and governance principles can drive better decisions, writes George Carter
It is increasingly common for public and private institutions to offload their “unethical” investments, often in response to demands from their constituents and customers.
Last month Auckland Council voted to follow the lead of cities like Paris, San Francisco and Sydney, and withdraw its investments in companies that produce and extract coal, oil and gas, following years of pressure by environmental activists.
And we regularly hear of those who are working to encourage large investors — cities, universities, churches, pension funds, museums and other institutions — to adopt a particular ethical or moral position on aspects ranging from gambling to alcohol and fossil fuels.
There’s nothing new about ethical investing, what’s changed is heightened public awareness of where our private and public savings are being invested, and increasing recognition that a focus on maximising short-term profit is not the best, nor most sustainable, approach.
Unfortunately, not all investors agree on what is and isn’t important, meaning the challenge for asset managers is in deciding how to help the maximum number of people without reducing the approach to a lowest common denominator, and thereby making it unattractive to most investors.
In New Zealand, institutional investors who enjoy good access to executives and boards are able to influence the behaviour of companies in which they invest.
For the majority of investors, though, the options for ethical investing are limited to simplistic screening processes for pooled funds, such as blanket bans on firms focused on profiting from activities such as alcohol, gambling, tobacco and fossil fuels.
The trouble with such screens is they are crude, subjective and rarely align fully with the attitudes and behaviours of the investor.
Alcohol producers and sellers, for example, are often excluded from ethical funds due to the social harm from their product, yet some 80 per cent of Kiwis admitted to having had a tipple in the previous year — a fairly strong indicator most of them wouldn’t want alcohol production to cease.
Such is the dilemma for those wanting to invest responsibly — if the blanket bans don’t match your own values you may be turned off the idea simply because you don’t want to look like a hypocrite.
One solution is a more nuanced approach in the form of the environmental, social and governance (ESG) principles that are at the heart of the United Nations’ Principles for Responsible Investment. Awareness of ESG principles is growing and the adoption of these features in investment processes is becoming increasingly mainstream.
ESG isn’t about slavishly avoiding stocks in a certain industry, or trying to force a particular ethical or moral viewpoint on other investors — rather it’s about incorporating such principles into investment decisions with the goal of improving the longterm interest of markets, economies and ultimately, society.
For example, instead of banning investment in alcohol companies, an ESG approach may ensure a company does not have a record of marketing to minors.
Financial metrics will always be an essential component of company research. In addition to these, though, by including such important non-financial information the goal is better investment decisions, better social responsibility and more effective risk identification and management.
No investor wants to sink their money into a stock that’s worthy but ultimately worthless. ESG thus offers a sophisticated solution for investors for whom ‘added value’ isn’t just extra money.