Budget Buster: The case against ‘ethical’ investing

Last updated 05:00 08/10/2017

Many investors believe headlines claiming if they have shares in a weapons company it means they are bankrolling arms dealers. But this demonstrates a misunderstanding of how the stockmarket works.

Richard Meadows: Ethical investing is anything but simple. The most fiercely debated question is whether doing good comes at the cost of lower returns for investors.

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OPINION: Ethical investing is so hot right now. A few years ago, there were only a few boutique firms offering funds that screened out all the nasty companies.

Then the bombshell landed. It turned out KiwiSaver providers were investing retirement cash in the likes of weapons manufacturers and tobacco firms. Most of it wasn't deliberate – they had small exposures through giant foreign funds that own a slice of every single company – but the public was scandalised.

Many of the big players have tidied up their act by moving investor cash to funds that screen out those companies, or are in the process of doing so. The net result was a massive 2500 per cent increase in ethically invested cash in the space of a year.

Pats on the back all around? Not exactly.

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Ethical investing is anything but simple. The most fiercely debated question is whether doing good comes at the cost of lower returns for investors. Even after screeds of research, there's no firm conclusion as to whether shunning "sin stocks" is good or bad for your portfolio.

All of that is a bit of a distraction, because the real issues are with the underlying concept itself. Sectors that get screened out are arbitrary, and sometimes defy all reason. Controversial weapons are the most common, followed by tobacco, gambling, alcohol, fossil fuels, nuclear power and "adult content".

While these all sound suitably immoral and finger-waggy, I'd wager that most of us hypocritically enjoy at least two or three on a regular basis. Those who lead the fear-mongering campaign against nuclear power have blood on their hands, considering it's about as clean as energy can be, and has caused far fewer deaths than any other way of making electricity – yes, including the solar and wind so beloved of supposed environmentalists.

The other glaring inconsistency is there's plenty of other money invested in genuinely terrible things that no-one happens to care about. For example, KiwiSaver schemes buy sovereign bonds from countries that use the investment cash to support their agendas – which includes anything from subjugation of women, to the death penalty, to murdering homosexuals, to encouraging extra-judicial killings.

Here's the kicker: Even if I was wrong about all of the above, ethical investing still wouldn't make a jot of difference, and might even do more harm than good.

If you believe the headlines, having shares in a weapons company means you're bankrolling arms dealers. This demonstrates a woeful misunderstanding of how the stockmarket works. If you buy shares in Evil Corp, you're giving your money to another investor in exchange for their stake. Evil Corp doesn't see a cent of it.

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If you boycott Evil Corp by selling its shares, once again, nothing whatsoever happens. Another investor who doesn't share your convictions will very happily take them off your hands. If enough people pull out of "sin" stocks en masse, the share price will go down, but that just means less scrupulous investors get a juicier deal.

The market is nothing if not ruthlessly efficient. Evil Corp is always going to be owned by someone. It might as well be you, so that you can take that money and do something good with it.

If you don't like a company or sector, boycott its products (which is how it actually makes money). Protest against it. Take the dividends it pays out, and donate the money straight to groups lobbying to change the law, or to charities or NGOs working in that field.

The danger of ethical investing is that it gives the illusion of doing good – the warm fuzzies – while changing nothing whatsoever.

"Maybe", I hear you say, "but I can walk and chew gum. I'll be an ethical investor, and do all the other good deeds, too."

Science says you probably won't. There's a quirk of psychology called "moral licensing", which makes us less inclined to behave virtuously when we've already done some token good deed. You might think of yourself as an eco-warrior after faithfully recycling for 20 years, but you'll wipe out all those benefits by going on a single long-haul flight.

This is a really counter-intuitive thing to grasp, but it's also incredibly important. Empty and effort-free warm fuzzies are oh-so-tempting, which makes them a dangerous distraction. If you actually care about making a difference, don't get sucked in by the ethical investing hype.

Got a burning money question? Email Budget Buster at richard.meadows@thedeepdish.org, or hit him up on Twitter at @MeadowsRichard. You can also find links to previous Budget Busters here.

- Sunday Star Times


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