In the wake of Donald Trump’s decision to pull the United States out of the Paris Climate Accord, it’s easy to feel somewhat helpless if you take the view – as I do – that action is needed on climate change.
Ethical investing is gaining momentum for all the right reasons, but it’s not always the best way to make a difference. Photo: afr
For the record, I think the scientists are right. But there’s a higher logical framework: if they’re wrong and we have a cleaner environment, that’s still a good thing. But if they’re right and we do nothing… Or, put another way, you’re very, very unlikely to lose your house to a fire; but you have it insured anyway, don’t you?
So it’s no surprise there is momentum in the area of what I’ll broadly call ‘responsible’ investing.
That’s a necessarily amorphous term, and takes in the whole gamut of ‘I want returns plus…’-type thinking. The various labels often used in this area are ethical investing, impact investing, pro-social investing or ESG (environmental, social and governance) investing.
Whether or not you think such an approach makes sense – for yourself or others – it’s hard to deny the groundswell of money moving to such a strategy.
Most of the activity is happening at the big end of town. Asset managers are offering their clients ‘responsible investment’ options, and new fund managers (and super funds) are springing up to capitalise on the trend.
As consumers, if we’re so inclined, we can look for funds and fund managers that take such an approach. But as individual investors, what can we do?
First, here’s what not to do. Some would disagree with me here, but I think the worst thing you can do as an investor is invest in a company just because you hope its earth- or society-friendly products or services will be successful.
By all means, cheer for the company’s success — but remember that when you buy shares on the ASX, the company gets none of that money. You’re just buying from a current owner. Buying a used Holden doesn’t help the company.
What can you do?
If you’re ethically-minded, and don’t like the idea of profiting by owning a company that creates negative outcomes for the world, then use that as one, but not your only, filter. Look for businesses that meet all of the ‘traditional’ investment tests, and then add an ethical filter on top.
If you’re going to buy shares of a poor business that’ll end up delivering you a loss on your investment, all you’ve done is enrich the person who sold you the shares at your expense. You would have been better off simply donating those losses to your favourite cause, and not investing at all.
The great thing for ethical investors is that the companies which tend to make the ‘responsible’ grade tend to be, generally speaking, better companies.
The ones that have big futures are likely to be those — in general — that are meeting a new need or opening new markets. And equally, those companies that are doing what some consider the ‘wrong’ thing are likely to suffer from the increased pressure from an unhappy public and a (not unrelated) potential regulatory response.
Of course, this isn’t a simple or guaranteed strategy: one of the very best performing US companies, measured over decades, is the cigarette maker Altria (formerly known as Philip Morris).
Lastly, while investing ethically might make you feel better, it might — just might — make sense to maximise your investment gains and simply choose to donate a proportion of your profits to your preferred charity. That doesn’t sound as effective — or as clever — but might just make more of a difference, after all.
Many of us want to think we’re ‘doing well by doing good’. It’s a seductive idea. And, given the choice, I’d rather make money by investing in something that improves society, rather than making things worse. But ethics, like beauty, is in the eye of the beholder.
Either way, your money can still be used for good, if you choose. And that’s probably the key thing to remember. Because, whatever you would prefer to believe, those companies don’t know you own them.
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Scott Phillips is the Motley Fool‘s director of research. You can follow Scott on Twitter @TMFScottP. The Motley Fool’s purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691).
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