23 October 2012
Nathan Field, Senior Equity Analyst at Gareth Morgan Investments
While the primary aim of investment is to make a financial return, most right-minded people are also concerned about social issues such as sustainability, corporate ethics and public health. To cater to investors who place a particular emphasis on these issues, a number of funds adopt socially responsible investment as a key selling point.
The aim of ethical investing is admirable, but in practice, it’s a difficult strategy to follow without drowning in hypocrisy. To illustrate, let’s take a look at the range of sectors and companies that an investor might consider unethical.
Right at the top of list are tobacco stocks, and they’re easy to rule out. In some ways it’s a shame, because tobacco companies generate huge cash flows and are highly resilient to economic downturns, but since their products kill people, it would be difficult to describe them as ethical.
Gaming stocks are another obvious target. Sure a night playing blackjack is fun, but the way casinos gleefully suck cash from gambling addicts and heap misery on vulnerable families makes it tricky to include them in a socially responsible fund.
Next we have defence stocks, and here things start to get murkier. Weapons kill people, but they can also be used for good (e.g. NATO forces). For arguments’ sake, let’s say they’re all bad. But it’s not a simple matter of drawing a line through pure defence companies.
For instance, Boeing is one of the largest US federal defence contractors. The same company also receives billions of dollars every year from commercial airlines like Air New Zealand, which fly the big, friendly versions of its planes. There is no separation of ownership between Boeing’s commercial and military divisions, so in a way, when you are boarding a 777 to Rarotonga for a well-deserved holiday, you are indirectly supporting the US war effort.
Ridiculous, right? This is the problem with taking a hard line on ethical investing – you don’t have to scratch too hard to find the bad in almost any company.
Alcohol is another grey area. There is no doubt that booze is destructive when abused, but most of us have enjoyed a drink over dinner, or at a barbecue, or at wedding, and who’s to say that’s wrong? The same goes for fast food restaurants and soft drink companies. Too much fatty food and sugar is bad for you, but can we really damn a company for serving up what customers want?
It doesn’t end there. Following a strictly ethical investment strategy would require you to reject most energy, mining and auto companies (for their contribution to global warming), food and beverage companies (due to palm oil use and animal testing), internet and media companies (on invasion of privacy and questionable corporate ethics), multinationals (exploitation in emerging markets) and pharmaceutical companies (all of the above and then some).
What you’d be left with would be a bunch of solar energy and wind turbine stocks, which incidentally, have been terrible performers over the past five years.
The point here is that ethics are very much in the eye of the beholder. And while ethical funds are suitable for a certain type of investor, we don’t think it’s a fund manager’s role to decide which products and services are good for you, or good for the planet. We are investment professionals, not the moral police.
At GMI, as part of our Responsible Investment Policy, we don’t invest in companies primarily engaged in the sale of arms, tobacco, or gambling services. We don’t expect our clients to agree one hundred per cent with this policy, but it’s there for all to see, and it’s consistent with our core values.
At the end of the day, our primary commitment is to look after our clients’ money with due care and skill. And while social and environmental issues are a consideration, we don’t let them dictate our investment decisions. Otherwise, we’d have a very short list of investment opportunities.