The moral dimension of investing
Sustainable investing has steadily gained momentum in recent years and can now safely be described as one of the most well-known investment trends of the decade. More recently, care has been taken to measure a company’s environmental and social contributions to the world, both positive and negative, in order to achieve more objectivity about an ESG-friendly investment.
While science-based metrics are now emerging to measure portfolio temperature and even social impacts are becoming easier to quantify, it is much more difficult to objectively determine whether an investment is ethically appropriate.
Sawan Kumar, Chief Executive Officer at Evenlode Investment, says: “‘Ethical investing’ is generally referred to as investing based on the individual’s or institution’s own ethical and moral values. However, because the moral values are different, there are no industry standards Definition of what ethical investing is. “
The concept of “ethical” investing dates back to the 1960s when religious groups such as Methodists, Quakers, and Muslims set ethical standards for their investment portfolios. The first “ethical” funds, launched in the UK and US, used a simple negative screening approach to avoid so-called “sin” industries such as tobacco, gambling, pornography, alcohol and firearms. These exclusions were based on religious principles and beliefs.
Fast forward 60 years and our world has undergone profound changes. One of them is the exponential growth of technology and the connectivity that the internet offers us. As the world has evolved, so have our moral values and expectations, and these days ESG portfolios are much more complex than simple negative screening approaches.
With this in mind, Clem Sunter, scenario planner and futures strategist, says it is “very important that companies have an ethical compass that informs them of what is acceptable and what is unacceptable these days, as your reputation can be lost in a flash.” one eye if you don’t “.
Speaking at the Nedgroup Investments Responsible Investment Summit 2021, Sunter said “an ethical compass is an absolute necessity” in the modern world, pointing out a number of “flags” that companies need to look out for
adapt their strategies and ultimately become more ethical.
These “flags” can also be described as the megatrends that shape the world as we know it today. This includes the global anti-establishment movement linked to inequality; the so-called “green” flag, which indicates our current state of environmental disaster; the uncertainty caused by the pandemic; and the changing work environment influenced by the adoption of AI and robotics.
Sunter believes that by analyzing these trends, companies “can be made to act more ethically and adapt their strategies and tactics to some of the flags that are emerging in the external environment.”
Kate Elliot, Assistant Director of Ethical, Sustainable and Impact Research at Rathbone Greenbank Investments, agrees that as an investment firm it is critical to have a “general sustainable investment philosophy and organizational values” that determine whether a particular investment is ethically appropriate is.
“We want to avoid companies doing harm and invest in companies that benefit people and the planet,” she says.
“This means, for example, that we would never invest in a tobacco stock, even if a client’s own responsible investment policy permitted it.”
She adds, however, that “almost the easier part of that equation” is to exclude companies based on their activities, while “it is important to look at a company’s behavior and culture when considering whether it is comfortable in our investment universe.” find is “. .
“The benefit of specific exclusions is that they have clear red lines and help investors define what stocks they are buying,” she says.
“However, if you’re not careful, set exclusions can leave you reliant on individual data points rather than understanding what you’re investing in and why.”
In their view, Tesla is a good example: a stock that, because of its innovation in electric vehicles and battery technology, is seen by many as a strong addition to an environmentally conscious portfolio.
However, Elliot says, “When we looked at it with our proprietary screens, we had concerns about US labor standards and governance. Add that Bitcoin was recently purchased and even the company’s environmental performance is not looking so good.
“This is just one example of why we believe it is important to have a holistic view of organizations. It is not enough for a company to excel in the environment if its house is not in order on social or governance issues . “
The FAANG problem
Similar concerns have recently been raised regarding so-called FAANG stocks, which dominate the US technology market. These tech giants have been embroiled in antitrust lawsuits (Facebook was accused of creating a monopoly by buying WhatsApp and Instagram), were accused of misusing customer data, and even raised concerns about the potential to rig elections.
For anyone who’s watched the documentary The Social Dilemma on Netflix, social media has forever gotten an eerie glimmer that questions us about how ethical fast-paced technological developments really are and whether we should look at them through a different lens.
Sunter believes the rise of social media and the internet is behind the anti-establishment flag. The unprecedented “networking” that we enjoy today is leading to the #blacklivesmatter movement, but also to less positive populist decisions such as the election of Donald Trump as US President or the vote for Brexit in Great Britain.
“The biggest thing about this flag is the inequality in the world,” he says. “In fact, during the pandemic, it is the billionaires who have gotten so much richer because they usually work with the internet companies that have done so well because of the lockdown, while the middle class and poor have done poorly.”
Hervé Guez, Mirova’s global head of research and CIO for stocks and fixed income, agrees that we need to consider how big tech companies participate in creating value, how they interact with our lives, and what regulations we ultimately need to control them .
“What do these companies contribute to society and local communities?” he asks.
“In the long run, your operating license is at stake. The sooner you look at them, the better you can not only survive, but also develop new products and gain a better competitive advantage.”
However, Guez believes that individual values are no longer enough to determine a company’s ethical criteria. Rather, we should look at the various challenges facing our society as a whole and direct private capital towards solving these challenges.
“In a way, it makes it clear what we want a company to do,” he says. “It doesn’t just depend on personal values, it is based on the sustainable development challenges we face and they are universal. They are much more complex to define, measure and quantify, but there is a common ground, which is SDGs. “
To keep this part of the investment decision-making process separate from financial considerations, Mirova has an ESG research team of non-financial experts. This allows them to focus specifically on environmental and social issues and only evaluate each company against the 17 Sustainable Development Goals (SDGs) in order to eliminate global problems for all.
Guez notes that looking beyond a company’s corporate social responsibility (CSR) policy is key to determining if it is delivering the E and S benefits that it claims.
“Having a CSR policy doesn’t mean that all of your products are automatically sustainable. There is a temptation in the financial sector to say that all of your products are sustainable when you have an environmental policy. However, companies need to demonstrate and justify it . “
He adds that the coronavirus pandemic has increased the need to incorporate ethical considerations into the investment decision-making process.
“It has become clear that the whole intellectual construction of markets, the idea that they are robust and efficient, no longer makes sense. It is clear that there is a connection between public and private issues,” he says.
“So it raised the question of how companies could contribute to this crisis and reiterated the idea that investors need to think about the externalities of ‘E’ and ‘S’.”
Kumar adds that while the definition of “ethical investing” is still a work in progress, investors play a key role in clearing this confusion as they are able to engage with companies on social and governance issues.
“This has the potential not only to improve transparency on ESG-related matters, but hopefully also to incorporate / normalize ethical considerations in investment decisions,” he believes.