Guns, tech stocks and the shifting sands of ethical finance
By Simon O’Connor, CEO, Responsible Investment Association Australasia
Ethical investment used to be pretty straight-forward – avoid your traditional sin stocks, and invest in the rest of your universe.
Recent developments have shown us just how far we have moved on from those days of safe, simple ethical investing to a much more complex world.
This last week we’ve seen another text book example of ESG risks translating from the non-financial (ie not within a financial statement) to slap bang in the middle of financial valuation. When it was revealed that Cambridge Analytica had ripped privacy data straight out of Facebook and used it to target American voters in large year’s Presidential election, it sent an earth tremor through the darling tech stock sector resulting in a 10% fall in Facebook’s share price. It confirmed for many investors what had earlier been identified as a major risk sitting on the Facebook business plan – the security risks and privacy risks of being one of the biggest data companies in the world.
Media questions soon followed – should Facebook be in ethical investment portfolios?
This followed only a few weeks after gun stocks became the newest edition to long lists of sin stocks, with big investors putting pressure on gun companies, but also the retailers of their products. We saw a number of companies distancing themselves from guns makers, the NRA, and retailing of guns, as investors laid the pressure on listed guns stocks.
The world is changing around us and good investors need to be staying on top of these shifts. Social norms can change over night, as we’ve seen in the US around guns, and we’ve had our own examples here, such as the coal seam gas industry and community and state government backlash. It is no longer sufficient to set and forget your ethical or responsible investment policy, as that will not allow you the ability to respond and adapt as debate and opinion changes.
Beyond the traditional negative screens in ethical funds, ESG issues and ethical controversies can and do occur across any sector of the economy. A flat set of negative screens will not prepare an investor for wage theft issues in franchisee businesses, nor money laundering allegations, nor environmental breaches by miners, nor emissions test cheating in vehicle companies.
That’s why we see the gap between ethical investors and responsible investors rapidly shrinking, where responsible funds (ie. ESG funds) will commonly have negative screens in place, and ethical funds (ie. negative screened) will integrate ESG assessments. The most savvy responsible investors employ a broad range of RI strategies – from divesting, to ESG integration and shareholder engagement, to impact investing – finding benefits within each approach.
Rapidly shifting social norms, the realisation that previously considered externalities will often end up directly impacting risk and return, and rising consumer expectations on their investments, are all trends that are only gaining momentum. These trends make it essential for funds to allow themselves a means by which to assess these ESG and ethical issues in an ongoing manner, to have a framework in place for when the next issue arises (because it will), and be proactive in identifying these big issues before they hit the share price.
This is the way responsible investors can continue to deliver on their promise of strong investment outcomes, but even more so provide products and services our members and clients can be proud of.