Ethical investing II: the days of Gordon Gekko-style greed are over

Donovan Mathews here, a few weeks back I ran a survey on ethical investing (if you missed it, you can click here to read it) and I just want to thank you all. The response to the survey was amazing.

We were trying to find out whether personal investors consider the ethics of a company when they invest.

The survey threw up some interesting conclusions, which I will share with you in this article.

Not only that but we had some fantastic written responses to a few of the questions, which I will be highlighting and responding to also.

Starting off, let’s look at some of the percentages.

Instead of including each question, I have selected a few that reveal the most.

As you can see below, when questioned whether the ethics of a company is part of your decision to invest, a resounding 75% said yes.

Do ethics or ethical value ever influence how you invest, for example are you more likely to invest in a business that also serves a positive societal outcome?

And, an even bigger proportion of readers said they were likely to invest in a portfolio that was based on ethical investments.

If an investment portfolio were geared towards investments in companies that were ethically driven, would you be more or less likely to invest?

Drawing from these figures it is fair to say that many of our readers not only think about the ethical stance of the company before they invest but would be happy to invest in a portfolio based on ethical responsibility.

However, the results become more interesting when we asked readers whether they avoid investing in companies that are considered unethical.

Have you ever NOT invested in a company because it is – in your view – unethical?

When we asked our readers whether profits were the only influence over their investment decisions the results were even more revealing, with only 56% of readers investing with other factors in mind.

Are there any other factors that influence how you invest other than making profits?

I believe this indicates that for most people ethics is a positive value attributed to a company that might increase the likely hood of investment.

But the ethics of a company or the unethical behaviours of a company are less likely to act as a deterrent. It works asymmetrically and is summed up well by one of our readers:

 … I would never pick a stock on ethical grounds, it would still be money first. If it was ethically excellent that would simply be a bonus.

Despite my point above I must stress the majority (56%) of you were influenced by other factors when you invest, not just profits. And had chosen to not invest in a company because it was unethical.

But, what the above highlights is the trepidation some investors have with using ethics as a measurement for our investments, as it might prevent opportunities to make profit.

For the 17% of readers who said they would not invest in an ethical portfolio, this worry of ethical investments ability to generate profits was a consistent theme.

While I understand this worry, one of the points that I was making in my previous article was I think the industries of the future, the industries that will be taking the place of big pharma or the oil tycoons for example, are increasingly ones with an ethical outlook.

These new industries, whether that be electric vehicles, medicinal cannabis or renewable energy to name a few, will therefore represent good investment opportunities as they have the biggest growth potential. And an ethical portfolio would be backing these industries perhaps more so than other portfolios.

Now obviously these funds would be investing in smaller cap companies and this makes it a higher risk approach but it’s one which comes with higher rewards for a successful investor.

Even having said that, there have still been opportunities in the past two decades to earn well from an ethical approach. Take Kames Ethical Equity Fund – from January 1999 to November 2018 the fund had grown 282.2%, outperforming the UK stockmarket which grew 196.3%.

Another ethical fund, WHEB Sustainability Fund, grew 12.08% last year this is just a little over 2% off the top ten best-performing funds of 2018.

This is not to say that ethical investing was the most valuable investment for your money but there have been possibilities to earn decent money. I think looking to the future, companies operating ethically now have the potential to be future giants of industry.

Another issue with ethical investing that came up again and again was the difficulty of classifying ethics, which I touched on in my previous article.

The concern being, ethics are hard to define and the ethical constraints on the portfolio might not align with the ethics of the subscriber.

One of the reasons we asked you whether you believed investing in legal, medicinal cannabis firms was ethical, was because we thought it would be something that might divide opinion on what can be considered ethical.

This assumption was completely wrong as 95% of you thought medical cannabis to be ethical.

Whilst pretty much everyone agreed that medicinal cannabis firms are ethical, the point that ethics are personal and an ethical portfolio might not match the beliefs of those who subscribe to it, is a problem that many readers raised and would seem to be one of the major deterrents.

This does not mean that ethical portfolios are therefore void. What it means is that you might have to do some shopping.

Managers of any ethical portfolio will set out the parameters of what they consider ethical and therefore what they will be investing into.

If interested in investing ethically then it would be down to you to choose one that was most aligned to your viewpoints. This might be a focus on environmentally friendly companies, social welfare, infrastructure projects; whatever it is, there will be a portfolio that is more suited to your beliefs.

Another problem raised, which caught my attention, was that an ethical portfolio artificially restricts the pool of companies to invest in.

Not only that, but one reader highlighted that the restrictions were based on “non-financial” and “arbitrary” criteria. Their argument being, why restrict ourselves and decrease the pool of companies we can make money from?

I think this is a fantastic point but I would argue that an ethical portfolio works on two levels. The first being as a financial asset and a way to make money. The other would be from a moral standpoint.

Whilst the endgame to investing is obviously to make money, an ethical portfolio would do this by also helping drive positive societal change and a better outcome for our future.

In many ways, the point of an ethical portfolio is that its criteria comes from a non-financial area.

This might sound arbitrary but I can guarantee that each ethical portfolio would operate with strict criteria that both adhered to a financial logic and an ethical system.

For the 57% of you that invest using other criteria then just profits, we were treated to some insightful ideas.

A lot of readers said how a business treated its employees came into their ethical standpoint.

We have, most likely, all been employees at one point and we know the value of being treated well and being treated poorly. It’s a relatable problem and an understandable measurement of an ethical business.

The most common ethical criteria that readers looked for was a company with an environmental responsibility and this worked the other way so that readers were less likely to invest if a business was environmentally irresponsible.

The good news is that many of the companies at the forefront of environmental change also are stellar investment opportunities. As the world swings to a more environmentally conscious future, these companies are gaining traction.

Our technology expert Eoin Treacy has been working on just this idea. In fact, he has been focusing on companies set to revolutionise the energy industry.

If you want to understand and anticipate how technology will change the world, Eoin’s Frontier Tech Investor service might be able to help. Also if you subscribe now, you can get your hands on Nick O’Connor’s technology investing book, The Exponentialist.

These are companies all working towards a more environmentally responsible future with their potential for growth being nothing short of amazing. That’s all I can say for now but keep your eyes peeled for more information coming up next week.

Ultimately, I think ethics and investing can go hand in hand. It doesn’t have to be one or the other and I think in many ways this social responsibility has been lagging behind in the financial sector for too long.

The editor here at Southbank Investment Research, Nick O’Connor, did a talk recently where he suggested that the rise of populist movements and general disenfranchisement surrounding our society today might have something to do with a disconnection from capitalism.

There is a feeling that financial institutions and big companies have a different set of rules to the everyday citizen. This frustration is leading to movements that are not good for business. Populist governments will result in higher taxes and further governmental control.

In order to counteract these movements what I believe needs to happen is for every business, not just businesses that we can define as ethical, to accept a social responsibility.

By doing so, I would argue, it would counteract the growing movement of people that feel left behind by our society and the desire for governmental measures to control wealth.

This has been put brilliantly by one of our readers:

The time has come for businesses to evolve their focus towards a new mantra: “make money, act responsibly” The days of Gordon Gekko-style greed are over, to be replaced by blockchain-era transparency and business integrity. Those with money, and the power that comes with it, need to understand that ethical behaviour, sustainability, social responsibility, and the common good all need to be actively supported. If not, then the growing armies of socialists and liberal populists, all of whom feel disenfranchised by the status quo, will steal that money away through taxes and regulations, in order to fund more inept government programs and attempt to legislate ethical behaviour.

Ethical investing might be a step in the right direction but the idea that we have to separate out ethical investing from “investing” might just be the problem. All business should operate with a social responsibility; business integrity and a sustainability that looks to improve our future not disrupt it.

If this doesn’t happen, then it will be the turn of government to step in and legislate ethical behaviour. The way current Brexit negotiations have gone, the idea of government trying to legislate the intricacies of business and ethics fills me with a tedious dread.

All the best,

Donovan Mathews
Exponential Investor

Category: Commodities

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