Values investing

We all have values. Whether these are about personal gain, helping others or saving the planet, they’re all values. But how do our values inform our investment decisions? I start with an example from early June.

Selling fossil fuel shares is very trendy

At a recent stakeholder meeting of a fund over which I have a governance role, a motion was passed to sell shares in companies extracting fossil fuels. The motion itself was more poorly worded than that, but that’s what its sponsor seemed to mean. It’s a popular theme among churches, charities and universities who place high values on reducing carbon emissions. But does selling such shares actually help to save the planet from the effects of carbon? My own belief is that it does not.

Selling fossil fuel shares might create headlines but when we ask ourselves: Who will buy the shares? we realise that the answer is most probably an investor with less concern about the environment than ourselves. This leads to a potentially more damaging fossil fuel company than one where we might have lent our vote to resolutions directing the company to clean up its activities.

So what has gone weird with ethical investment thinking?

Before getting carried away, let’s first acknowledge that the money is being invested for a purpose. In the example above, that purpose was to generate a rising level of income to fund the activities of a church. On that criterion alone, the ideal policy would be to place no restrictions on investments, and to keep costs down using pooled funds to diversify risk and to access asset classes normally unavailable to smaller investors. But as restrictions are added, many pooled funds are disqualified and even segregated mandates become tricky as these are generally run as generic strategies rather than anything specific to an individual investor.

A balancing act

Ethically screened fund management does exist, but the chance of an existing fund offering a 100% match to the investor’s values is remote, meaning a compromise has to be made, or an expensive mandate to manage segregated assets has to be afforded. The investor consequently needs to decide how much of the income is handed to the fund manager and how much goes to the activities the investment is intended to fund.

A screening approach, as I previously discussed, does not change any of a disqualified company’s activities other than to make them perhaps even less likely to change. However there is at least one good reason to screen investments. That is when the investor does not want profits from activities it does not sanction to flow into their investment portfolio. I don’t smoke and I don’t gamble and therefore don’t have a personal problem excluding such companies from my personal portfolio. I do, however, fill my car with petrol, use gas and electricity originating from fossil fuels, take the occasional flight and benefit from products with a large carbon footprint, such as steel and cement. It would be hypocritical for me to contribute to companies’ profits in these sectors yet omit a share of those profits flowing into my investment portfolio.

Making an impact

To make a real change in the world, according to what we value, investments need to be directed positively towards enterprises that promote the change our values represent. This is call impact investing. And to do it properly, your investment capital should be provided directly to the company as new working capital rather than just invested into the secondary market. For example (and this is not a recommendation) the Triodos Microfinance Fund invests into projects in the developing world in the form of loans. Returns are low by investment standards, at an average of 3.7% annualised. Other than the difficult-to-navigate impact fund sector, the alternative is to directly invest into something that makes sense to you. Such as buying a property for (affordable) rent or taking stakes in startups.

In summary

Our ethical values might lead us to avoid certain types of investment. But stopping there is simply lazy. And while it might immunise our portfolio from ill-gotten gains, it doesn’t actually change the way companies behave.

To make real change, become a shareholder activist. Hold shares in as wide a range of companies as you can tolerate, and keep an eye on special resolutions at AGMs.

Further, actively invest into assets, ventures, companies and social enterprises (or find a fund that does it) that further your values.