Friday, June 23, 2006

Ethical Investing 3 comments

(P.S: Sorry for any disturbances the advertisements above may have caused you)
Ethical unit trusts, otherwise known as green funds, are funds that seek to invest in a socially responsible way, seeking to invest in companies that benefit mankind positively in the long-term (main critieria typically being energy & resource conservation, environmental improvements & pollution control, and products & services of long-term community benefit), while avoiding companies that produce negative influences (main criteria being environmental destruction, exploitation of labour, business with oppressive regimes). It is apparently one of the fastest growing sectors within the unit trust industry in Europe (eg. UK), though I would not expect it to be the case in the US. Priorities are different in more urbane and sophisticated Europe compared to the fiercely capitalist America (as evidenced by the latter's disregard for the Kyoto Accord).

Such a form of investing which rewards "clean, honest and decent" businesses intuitively suggests long-term underperformance to mainstream funds, because they limit the stock sectors. Typically, traditional "sin" industries like alcohol, tobacco, gambling, pornography are avoided; companies/industries that cause excessive emittance of greenhouse, ozone-depleting or other polluting gases are avoided; companies that pay little regard to worker safety, or unnecessary animal testing, or exploit Third World labour, are also avoided. However, the results are surprising: there is evidence to show that ethical funds actually outperform mainstream funds over the long term, albeit modestly, according to research done by reesearch groups in the UK (see the book "The Ethical Investor" by John Hancock).

There might be several reasons to explain this. Firstly, environmentally-conscious and socially-conscious companies tend to more long-term focused rather than adopting the typical short-term bottomline focus, which can pay dividends eventually. Secondly, such companies tend to be able to retain talent better and have higher staff morale and consequently lower turnover. Thirdly, a limitation of choices and requirements for a more investigative approach into corporate practices of companies means fund managers will (have to) do sharper and more focused research on a narrowed subset of sectors and companies. Lastly and most importantly in my view, such an approach is in line with the general trend in Western governments and policies, in particular in the European Community, to push for environmental protection, limit pollution and promote socially responsible corporate behaviour.

That is why this style of investing would not take root in Asia anytime soon. If anything, the industries that ethical investing seeks to avoid: tobacco, gambling for example, might be among some of the fastest growing in the Asia-Pacific, while many industrial practices, emission/pollutant levels and most importantly, corporate attitudes, probably fall short of ethical investing standards. As far as trends in the Asia-Pacific are concerned, and as far as the flexibility in exercising personal discretion is concerned, it does not make sense for the individual investor to purposely and severely limit his options through a socially responsible stance. This is consistent with my view that the investor/trader is there to make money as his sole purpose (see a relevant earlier article: "How much value do investors/traders add to society?")

However, it is one thing to invest on the basis of the monetary objective alone, but another to hope for catastrophes to occur in order that one's chosen stocks may benefit. I have seen people publicly wishing that hurricanes will strike the US coasts like what Katrina did last year, because that will mean that their oil stocks SPC and Interra will rise. There were also people buying into Medtecs in 2004-05 on hopes of a bird flu eruption or SARS relapse. There is a Chinese saying for this: building one's happiness on the troubles of others. There is a fine line between being morally ambivalent in pursuit of wealth (the capitalist approach), and being morally reproachable in hoping for bad things to happen to others so that one may benefit monetarily. Although we might not be into ethical investing, I think the important thing is that we do not drift into the opposite extreme of unethical investing.




Anonymous Anonymous said...

Nothing wrong in my view with investing in unethical industries - as long as it is legal. I think your point about investors properly being neutral on ethics is correct, that is as far as the investment process is concerned. One could have passionate views on the evil of weapons of warfare or tobacco etc - but that is neither here nor there as far as investing is concerned. (Investment or non-investment by one will not change these evil things one jot). As per my first point though, a case can be made for investing in "vice" eg Vicex in US
Again, investing in Vicex or Altria or Halliburton does not connote approval of what they do.
(Just for interest my posting along these lines on another forum got deleted ;) )

6/25/2006 3:22 AM  
Blogger DanielXX said...

Strange forum you were on that actually deleted innocuous comments like these :-)

6/25/2006 6:18 PM  

Sounds interesting.

12/11/2012 4:30 PM  

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