What is ‘Ethical Investing’?
We are reaching an inflection point – a point where only considering traditional financial factors could be a costly decision. As we roll into 2020, Blackrock, the worlds largest investment management firm, says focusing on sustainability is key to investment success. Read this link for more on the $7 trillion giant.
Can you reach your goals while investing in alignment with your values? Should we consider results beyond just financial performance of a company? What about the environment? How does the company treat their workers? How is the company governed (for example, are there any women on the board)? Does the share structure make it difficult for investors to have a say (for example, the founders control the votes)?
The evidence shows you can earn competitive returns and meet your financial objectives without sacrificing your values. There is research that shows that returns could be better over the long run when investing in more responsible companies. Think about headline grabbers: BP well blowouts, Joe Fresh clothing factory collapse in Bangladesh, destroyed tracts of rainforest for palm oil for chocolate bars – all these issues will continue to come to the forefront as we come to realize the impact we are having on the planet, and with more people having access to information. Investing in companies that are not paying attention to ESG factors – Environmental, Social, and Governance – is detrimental to your financial health.
What are examples of investments some investors choose not to own?
They could include mining companies, cigarette manufacturers, weapons makers, or companies that derive the majority of their revenues from gambling, pornography, or practices harmful to the environment (consider logging companies or fish farms). Some investors prefer to avoid investing in companies which test on animals, keep them in poor conditions, or require excess freshwater resources to produce what they do (think of the challenges of Coke operating in India where freshwater reserves are challenged).
So why is it that many ‘ethical’ investment fund managers still seem to own companies you don’t approve of? This is due to negative screening. They filter out companies in certain sectors, and generally allow for the rest. Many fund managers will have third party screens to ensure each position meets certain ethical screens, often focused on ESG. For some fund companies, there’s a level of engagement. If over time the Board of Directors doesn’t take recommendations relating to transparency, corporate governance, gender equity/diversity, etc, a divestment may occur. Some individuals look at ‘Shariah’ compliant portfolios, to try and be more ethical – but again, these may not meet your particular standards and criteria. I was asked the other day why Procter and Gamble and Unilever were in a WealthSimple Shariah portfolio. Wealthsimple, like many other investment companies, appear to outsource the ethical decision making process. The reality is, individuals who really want true power over what they own may have to build out their own portfolio.
Ensure you understand the principles of asset mix and diversification thoroughly before undertaking this process! Many who want to have an ethical portfolio end up underdiversifying or taking on far more risk than they should be. Contact us anytime for further guidance, and be sure to follow Conscious Wealth on Facebook for regular posts pertaining to ethical conduct in the world of business and investing.