Why invest ethically?
The myth of 21x impact
You may have come across a claim by the pension campaign group, Make My Money Matter, that “Making your pension green is 21x more powerful at cutting your carbon than giving up flying, going veggie and switching energy provider.”
While we are in support of the Make My Money Matter campaign to get people to green their pension, we don’t believe this is the right way of understanding the impact of pension or investment funds.
How should we understand the impacts of our decisions – particularly those around our finances? Let’s take the fictional example of Mrs Jones, who is on a mission to do what she can to reduce her carbon impact.
Firstly, she decides to do her weekly grocery shop on foot rather than using her petrol car. Her decision results in her using less petrol, which means her carbon impact is lower than before. The cause and effect is direct and easily measurable.
Next, she decides to stop buying meat (which generally has a high carbon impact) and instead buys plant-based foods. The real-world impact of this choice is not as immediate as her first because the meat that she would have bought has already been produced. However, over time the grocery shop will react to Mrs Jones’ changing diet by supplying less meat than before, which in turn will mean less is supplied by the producer, leading to lower carbon emissions produced.
Although this impact is less direct and immediate than the first, it is fair to say that Mrs Jones’ decision contributed to a reduction in carbon emissions.
Finally, Mrs Jones decides to green her investments by selling the shares she owned in a fossil fuel company and using the money to buy a stake in a renewable energy company. According to Make My Money Matter’s logic, this action would cut Mrs Jones’ carbon impact significantly because she is no longer responsible for the high carbon impact of the fossil fuel company.
The problem with this logic is that the carbon impact of the fossil fuel company has not reduced as a result of Mrs Jones selling her shares – the ownership of this impact has simply been passed to someone else. It is not right to claim that she has cut carbon because no carbon has actually been cut!
While Make My Money Matter’s ‘21x’ statistic may encourage people to green their investments, there is a danger that it might also make people complacent about other actions that have very direct impacts.
If you think that other actions pale in comparison to greening your investments, why bother reducing your daily intake of Brazilian grass-fed beef?
After reading the above, you might wonder why you should bother investing ethically, but there are several important reasons. The first is what we might somewhat cautiously call ‘associated impact’.
Some, if not most, of the positive impact associated with a product can be attributed to the end user (the person who buys and uses the electric car). But we can also attribute impact to others in the value chain, notably: those that run the company (the workers/managers) and the owners (shareholders).
Having a share in a company does not mean you can claim full responsibility for its impacts, positive or negative, but you are becoming part of the wider network that allows it to function and survive, so it is fair to say that your investment has an associated impact.
Expressing support for a sector
By purchasing shares you are expressing support for that company and the industry it represents – similar to how your vote at an election is a vote of confidence for a specific candidate and their wider political party.
When a company’s shares are in high demand, this is generally interpreted as a sign that it is healthy and its future prospects good. This makes it easier for that company to raise capital in future. By the same logic, when no one wants to buy a company’s shares, it may be difficult for it to raise capital in future.
As such, maintaining a buoyant share price is important for a company’s longevity. If a significant number of investors choose to shun or divest from a particular company or sector, it will make it more difficult to operate in future. According to research into the oil and gas sector across thirty-three countries, published in the Journal of Economic Geography, divestment can reduce access to capital for fossil fuel companies and make further exploration more difficult.
A company’s share price can also drop dramatically, such as following a controversy. This was the case in 2020 when the share price of fast fashion retailer Boohoo dropped 18% following revelations about poor working conditions in its factories. Some investors, including Aberdeen Standard Investments, sold their shares, while the Boohoo PR team no doubt went into overdrive in order to stop all the other horses from bolting.
Voting and engagement
If you own shares in a company, you get the right to vote at their AGMs and other meetings – the more shares you own the more influence you have. This gives you power to vote on matters such as who runs the company day-to-day (if you don’t like what the director is doing you can vote them out) and what should happen to any profits made (should they be awarded as director bonuses or should they be used to finance the company’s carbon-reduction plan?).
If you own a significant number of shares, as investment funds often do, you will likely be able to engage with companies throughout the year, especially if you are a long-term investor, as many of the best ethical funds are. For example, an investment fund might pressure a company by threatening to withdraw its investment if that company doesn’t start reporting on its carbon emissions by a given date.
Asset managers should be transparent about how they have engaged with a company so that consumers can assess whether they are engaging and voting in a way that they agree with. Of course, engagement doesn’t necessarily yield results: one small, iconoclastic fish in a big, conservative pond will struggle to have significant influence. For this reason, asset managers should also report on the outcomes of their engagement, to show what effect, if any, they have had – signatories of the UK Stewardship Code are required to do this.