|‘Responsible investors’ differ from ‘ethical investors’ in that morality has nothing to do with their investments [EPA]|
Melbourne, Australia – Responsible investing – despite what the appellation “responsible” might suggest – is not about investing morally. In fact, such investors commonly view ethical concerns as a values-based distraction from the primary task of making money.
As such, responsible investors (let’s give them the moniker, “Ms Responsible”) do not exclude companies or industry sectors for being unethical or harmful to the natural environment, human society, or the economy. The issue of climate change, for example, only matters in so far as it affects financial returns.
So, while there may be a favourable ethical outcome from investing “responsibly” – such as the exclusion of some XYZ mining company for failing to adequately manage its carbon tax exposure – such a decision would come about to be financially prudent, not moral.
There is, therefore, nothing more moral about Ms Responsible than Mr Finance-101 – one of those investment firms that are the target of the Occupy Wall Street protest movement, such as hedge funds, investment banks and so on.
Ms Responsible does differ from Mr Finance-101 in two ways.
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First, while Mr Finance-101 does not view environmental and social factors as viable financial indicators, Ms Responsible does. Crudely put, that’s the limit of her positive contribution to society.
Second, Ms Responsible has a tendency to overplay the “responsible” nature of her investment approach, despite not setting about the task of investing with a moral purpose. As illustrated above, whilst she may divest from mining company XYZ for its negative environmental effects, this is assessed as a financial risk, not an application of some non-negotiable moral code that precludes profiting from such activities.
In contrast, ethical investors (let’s call her “Mrs Ethicist”) go about investing with a dual purpose – both moral and financial. For Mrs Ethicist, while she seeks to make a return on her investment, she also cares about how that financial dividend is sourced.
Noting how Ms Responsible markets herself as having the financial prudence of Mr Finance-101 and the positive social effect of Mrs Ethicist, one colleague has privately labelled them “investment bankers in drag”.
That’s why I refer to her as “Ms” – she’s a woman who doesn’t want others to know what she is wedded to.
Ms Responsible is ‘irresponsible’
Despite only having emerged in 2006, investors managing approximately $30 trillion in assets now publicly identify themselves as being “responsible investors”. To put that figure into its proper context: some estimates put the total amount of investible assets at around $140 trillion, and ethical investors, despite having a history reaching back more than a century, typically account for as little as two per cent of the market’s assets.
It is therefore crucial we now critically reflect on whether Ms Responsible sufficiently differs from her mainstream cousins such as Mr Finance-101 as to justify the “responsible” moniker.
My answer is no.
My reasoning can be neatly expressed by recounting the details of an email discussion that took place in 2010 among thought leaders in the field of responsible investment.
The discussion began as a direct response to the BP oil spill – and more specifically, on whether oil companies such as Shell and BP could be invested in “responsibly”. Marked with the subject line “Time for a thought from the left”, the debate that it – and in part, my response – triggered illustrates why there must be growing scepticism toward the potential of responsible investment to have any meaningful and demonstrable effect on human society and the natural environment.
As the discussion unfolded, it appeared to me as though there were two predominant views.
The first line of argument – “from the left” – asked how Ms Responsible could invest in companies from the extractive industries such as BP and Shell at all. Expressed as it was then:
What is the point of sustainability indices then if they don't really contain sustainable companies? To legitimise business as usual, perhaps?
The second – and more pragmatic – view was that while extractive industries routinely inflict environmental and social harm on host societies, their size in the market (think of BHP Billiton and Rio Tinto in Australia for instance) means that a “responsible” investor seeking to maximise returns simply could not divest from them – “we are investors after all”, many interlocutors seemed to say.
I see [responsible investment] as about risk management, not morality. Thus what "ought to be" is not relevant.
The issue is that [responsible investors] are viewed as morally motivated by many lay investors, and in some cases I think the industry is actively misleading them.
When pressed, I went further still:
I recall the blacklisting of Rio Tinto by the Norwegian Government Pension Fund in September 2008.
At the time the Norwegian "Ethical Committee" announced to the media that they had sold down $1 billion in Rio Tinto stock for "grossly unethical conduct" at the jointly operated Grasberg mine in West Papua.
Rio Tinto responded the next day that they were "surprised and disappointed" with the Norwegians' announcement, and explicitly implied that they had no opportunity to discuss this matter with the Norwegians prior to the announcement.
A little digging around in fact indicates that more than three months of engagement took place prior to Rio Tinto stock being offloaded. In addition, Rio Tinto would have been aware that the co-owner of the mine, Freeport-McMoRan, had themselves entered into dialogue with the Norwegians over Grasberg for some five months, back in 2005/06 before themselves being blacklisted.
Proponents of [responsible investment] largely viewed the Norwegian actions as an exemplar of the failings of ethical investment. Namely, that by adopting a negative screen, or avoiding "sin stocks", the Norwegians had forgone the capacity to engage with the company and change their behaviour. Thus their reasoning may be sound, but their approach would not have the desired outcome.
Whilst generalisations are fraught with danger, I say "proponents of [responsible investment]" since the Norwegians later made public a large number of submissions they received on the adequacy of the policies and practices of their Ethical Committee. Many of those who expressed this critical view of ethical investment were submitted by what must be considered as "[responsible investment] proponents" from academia, NGOs, consultants and investment professionals.
Indeed [responsible investment] pioneers Innovest took the unusual step of issuing a statement to the market on the whole affair which read in part:
"NGPFG ("the Norwegians") has taken a traditional approach to [responsible investment] by screening out a company that does not meet its value-based mandate. In contrast, Innovest rates Rio Tinto highly because the company is a sustainable-mining leader relative to sector peers. And while Rio Tinto's involvement in Grasberg is of concern, Innovest feels the company is managing its overall [responsible investment] risks well, which should add to increased shareholder value over the long term."
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Now, to return to my original comments, as [responsible investment] is currently exposed and practiced, it is not about morality. Whatever the personal positions or motivations of the individuals involved, the products and services they sell are removed from ethics by both the language used (eg "sustainability" rather than "ethical") and the arguments on which their approach rests (eg "better risk-adjusted returns" rather than "values").
That is not to say that morality and the markets are mutually exclusive. Rather, I am merely stating that [responsible investment] was designed and communicated from the very beginning as a loose collection of economically rational financial metrics, which used alongside, not in place of, traditional financial analysis, would complement an investor's management of risk and harvesting of value.
Where they arose, moral dilemmas were left to ethical investors, whom [responsible investment] proponents often openly criticised (eg the seminal UN/Freshfield's report) and/or distanced themselves (eg changing the names of existing organisations to remove the word "ethical" as in the Responsible Investment Association of Australasia).
In my view, most astute [responsible investment] proponents - such as super funds, investment managers and consultants - are acutely aware of this, but blur the line when communicating to the end-investors whose money they are holding in trust.
In sum, I suggested that Ms Responsible differs little from Mr Finance-101, in that both seek to maximise financial return at whatever cost, and where they do differ, it seems to be largely based on Ms Responsible amorally claiming her pursuit of profit is in the common good.
Two years on, my judgment of Ms Responsible has only become harsher still: to unquestioningly morph from Mr Finance-101 into Ms Responsible is profoundly irresponsible. We must instead begin to listen to Mrs Ethicist – given the vast scale and scope of today’s institutional investment industry, the future of human society and the natural environment rests on it.
NAJ Taylor is a doctoral researcher at the University of Queensland, writing on the practice of environmental and humanitarian harm in modern warfare.
He was a founding member of the UN Expert Group on Responsible Business and Investment in Conflict-Affected and High-Risk Areas, and until June 2011, spent ten years advising billion-dollar institutional investors on ethical and responsible investment strategies.