The dilemma of ethical investment
Most of us want to leave the world a little better than we found it. To do so we make donations of money and time to deserving charities, agitate for change to government policies, join environmental protection groups, sponsor a child and so on.
There may be, however, another way: Invest your money so that it is targeted at deserving companies rather than undeserving ones. Called Socially Responsible Investing (SRI) this is something that many people try to do to make the world a better place.
SRI has been around for a long time and it sounds such a good thing to do: Avoid investing in sin stocks and, more positively, put your money to industries and businesses that are doing good things. Sounds good and easy. Well, unfortunately it is not that simple.
SRI is fraught with issues. It may seem easy and straightforward to invest for good social outcomes. However, it is more difficult than you might imagine. For example, I think that gambling does a lot of harm in society and so will not invest in Sky City.
However, how far can I take this? I can easily enough refuse to buy Sky City shares, but what about investing in Sky City's suppliers? Should I refuse to buy the shares of ANZ Bank (Sky City's bankers)? Should I refuse to buy the shares of the brewers who supply alcohol to Sky City? What about their electricity or telecoms suppliers?
As a direct investor who mostly buys individual shares I can generally choose how far to take my disapproval of gambling (I personally do not go beyond a refusal to buy the particular company that I don't like and do not extend my refusal to suppliers).
However, what about investors who invest by way of managed funds? Many managed funds in New Zealand would have some shares in Sky City. And, of course, when you start to invest in offshore managed funds, you open the whole gamut of sin stocks: tobacco, armaments, child labour etc. Again, most offshore-managed funds will have some or all of these industries.
Another big complication with SRI is that what may be a sin stock to one person is not to another. For example, I do not like gambling but, unlike some, I am happy to invest in a company that produces alcohol (a drug I have used on occasion). Yet another difficulty is that your investments may return less when you invest in non-sin stocks. Different studies have shown SRI to be both more and less profitable - studies sometimes give contradictory results.
My view is that SRI is likely to give lower returns as by excluding some stocks you exclude some opportunities. And so you have to ask what reduction in returns you are prepared to accept to improve the world.
Put all of this together and investing for good (or at least doing no harm) is neither simple nor easy. Direct investors can avoid buying things which are too harmful even though they have to know where to stop and to agree to reduced returns. However, what about investors who use managed funds?
This should concern most people: After all, there are 2 million people in KiwiSaver who are all managed fund investors. There are several KiwiSaver funds which target ethical investors although most of these are very small and should probably be rejected. I doubt that they offer sufficient diversification and their size may mean that they will be discontinued eventually. AMP Capital manages a Socially Responsible KiwiSaver fund of reasonable size which avoids industries like gambling, tobacco and alcohol.
Beyond KiwiSaver, most ethical investors who use managed funds will look overseas for funds to invest in - there are thousands of SR funds available and you will have a fine time choosing. Some of these funds are quite activist - for example, they will invest in companies that degrade the environment and then, as shareholders, agitate for change. Such investments may not always be the best financially but for a keen SR investor that is not the point.
I hate the idea of investing in a company that utilises child labour or makes money from the misery of others. However, I know that somewhere in one of the managed funds that I personally own there may be such a company. I can't be too purist about it and will do what I can - but I know that the world will never be perfect.
Martin Hawes is an Authorised Financial Adviser and his disclosure statement is available free of charge at martinhawes.com. This article is of a general nature and no substitute for personalised financial advice.
Sunday Star Times