On Wednesday I delivered the keynote address to a Financial Times seminar on ethical and socially responsible investing and thought the content generally of interest to share with a number of you. I have turned the speech in to a blog.
Behaving in an ethical or socially responsible way is one of those things that most people think they know about, but like most social definitions, what is ethical to me may be fun to you. In the not so long ago days, when we talked about ethical and socially responsible investing – and the two are not the same – we knew broadly what we meant: that we did not want to invest in companies that manufactured alcoholic drinks, tobacco products, encouraged promiscuous behaviour, and so on – generally the sort of assets that churches, charities and other religious bodies invest in. However, in today’s climate we have to rip up that definition and start again. As the Chinese say, we are living in interesting times. But in a world of historic social and economic upheaval, this throw away phrase means far more than it at first suggests.
Our values are changing, at least in Europe – unlike the rest of the world – we are becoming more secular in our beliefs; we are fast re-drawing the boundaries between what is socially acceptable, what is not, and the death of deference. We are also re-defining everything, including what we mean by ethical and socially responsible investing. Some of us have a very old-fashioned view of these asset classes, or even social beliefs, but times have changed.
In this modern age, we have to re-define our values, including what we mean by ethical investments? Do we restrict the idea to just the primary interest of the company? Should it include all stakeholders, including the geographical location of manufacturing firms? If so, what responsibility do investors in Union Carbide share for Bhopal, the destruction of the Amazon forest, or tyre manufacturers and other Belgian businesses have for the massacre of the Tutsis?
As investors in Brazilian equities, Shell or BP or the mass producers of ethanol, does that means we have no responsibility to the indigenous people living in the rain forests, fishermen making a living in the coastal waters off New Orleans, or Eastern Nigerians living in the slip stream of vandalised oil pipe lines? I beg to suggest we too have collective responsibilities.
I also suggest that we have individual responsibilities when doing our weekend shop – where our produce comes from, the air miles, the carbon pollution, the waste caused by so-called use by and best before dates – in a world in which one billion people go to sleep every night suffering from hunger. Some financial advisers and fund managers may say that decent returns must not be sacrificed on the altar of ethical beliefs? But is that not a contradiction in terms? Does the decision to become an ethical or socially responsible investor not include the presumption of receiving a lower return for your investments based on one’s principles? Does it end there? How about investment in financials that, as we now know, cooked the Libor books by fixing lending rates for mortgages, credit cards, swaps and other forms of finance, unknown to the general public, and even to the regulators? How about those banks that carried out effective fraud on borrowers with wide scale abuse of payment protection insurance, a perfectly proper product in the right circumstances?
One great attraction of the City as a financial centre is that it acts as a pulling force for the good, the bad and the ugly. From oligarchs, who have amassed billions of pounds since 1989, the year the Soviet Union collapsed, to dodgy African, Asian and Latin American multi-millionaires, who have amassed fortunes on the backs of their poverty-stricken people. What about corporate governance? Should shareholders take a more active interest in what goes on in the boardroom or the executive floor? Does all this raise questions about who owns companies, the executive team or shareholders?
The obsession at the moment is with emerging markets and their miraculous growth rates, but quite often, in the search for growth, or income, investors tend to ignore the regimes which oversee the environments in which they have invested. Let us take China: a communist state, controlled by an unelected central committee; or Brazil, a stratified society in which the gradation of skin colour is as important – if not more so – as skills and qualifications. Or, take Indonesia, where military rule has not dimmed the search for value by some investors; or India, which boldly claims to be the world’s largest democracy, but is in fact the world’s most corrupt kleptocracy.
Investors can often be like tourists, who often visit the most repressive regimes, or dirt poor countries, in the world and often only see the beaches and the fun side, not the oppressive nature of the ruling regimes or even the people. Bribery of third world politicians and civil servants to gain a commercial advantage; the mis-use of scarce resources; deliberately mis-selling products and services to people who cannot afford them or have no need for them; exploiting the ignorance of people by, for example, misappropriating their assets through the sale of mutual funds or the abuse of internal accounting processes – all these and more must be part of the vision of ethical and socially responsible investors.
One global scandal now is the re-introduction of resource colonialism by the Chinese, under the mis-guiding pretext of providing funding for development; land grab in Africa and Latin America by Middle East states and China, and by unscrupulous hedge fund managers, aided by corrupt and incompetent politicians and civil servants, is about the most brutal of modern deprivations. Ethical and socially responsible investors must take the rough with the smooth, in seeking spectacular growth, they must also realise the nature of that growth – often exploiting child labour, or paying a pittance to elderly workers to produce expensively branded products, or working in conditions that 17th century slaves would have rebelled against. So, in the mad rush for emerging market value, let us not forget that we are still talking about desperately poor people living in sometimes awful states. We are social animals and must take in to consideration the human condition, not just money-making.
I want to end with a challenge to all of us. When investing, when buying produce, when driving around with cheap petrol, that we remember the moral obligations we owe to future generations. Remember, it was only just over one hundred years that the internal combustion engine was invented. And in that time we have inflicted more damage on the earth than the previous 10000 years. Once we have a clear vision of the ethical universe we want to inhabit, then designing investment vehicles to achieve that ideal will become much easier.
Ethical and socially responsible investing must not be driven only by investment returns, that is like putting the cart before the horse. If we want to eat certain high-protein fish as delicacies, then there is a real danger of over-fishing; if we want to eat vegetables and fresh fruit that are natural in sunnier climes, then there is a real danger of either running up millions of unnecessary air miles, and the environmental damage that implies, or growing the same fruit and vegetables under cover, which also has implications for energy use. In other words, we must of necessity impose on ourselves restrictions in terms of what and how much we eat if we are going to responsible guardians of Mother Earth. Economic growth and dividends are not the be all and end all of the search for a satisfying life – sometimes it is the quality of that life.
That, I suggest, should be our legacy to future generations.