Soon after 29 November 1781, the crew of the slaver Zong were running out of water following several navigational mistakes. The ship’s Liverpool-based owners had insured the slaves as cargo – a common business practice. To ensure their own survival, but also to cash in on the lives of the slaves who would perish without water, the crew threw the 133 Africans overboard.
Upon reaching port in Jamaica, the owners made a claim on the murdered slaves. But their insurer refused to pay, and the dispute was heard by Lord Chief Justice, the Earl of Mansfield, who deemed the captain and crew at fault. The Zong massacre became the first of several legal cases that led to the abolition of slavery.
Although illegal, slavery still exists today. It is rightly seen as odious and therefore a practice investors avoid consciously financing. Gary Greenberg, Head of Emerging Markets at Hermes Investment Management, discusses how for investors in emerging markets, there is no shortage of ethical problems to negotiate: inhumane cultural practices and government attitudes and industries that generate profits while harming people and the environment. Governments in this universe restrict press freedom, throw whistle blowers in jail without trials, invade neighbouring countries or maritime territories, operate under martial law, and in some cases wage war against their own people. Companies profit from contributing to climate change – and not only in emerging markets – and by disregarding safety standards, fostering obesity and through corruption.
How should we respond to these abhorrent actions?
Expecting companies to become altruistic is asking a lot: on one hand, individuals are often self-seeking; on the other, ill-conceived or politically motivated regulation can be stifling, and no company can be expected to be totally selfless. Of course, many employers could pay their staff more, spend more on workplace safety and be more truthful in advertising. But no matter how well-meaning a management team is, it inevitably faces difficult trade-offs, with competing stakeholders to satisfy, mouths to feed and competitors to outshine. Companies cannot afford to gold-plate every socially responsible initiative: shareholders require a return on their investments, otherwise why should they invest?
Investors may wish to invest in completely sustainable businesses, but this would exclude an unacceptably high number of companies, making their job impossible and their clients miserable. And divestment means ending the dialogue. Divestment played a role in ending apartheid in South Africa. But what is the proper response to companies which, long aware of humanity’s responsibility for climate change, fund ‘research’ with the express purpose of denying it?
Non-moral v ethical investing
Some consider an investment in a business whose actions have potentially destructive consequences to be a matter of assessing the related risks, such as fines, lawsuits and reduction of brand value. This is simply a non-moral approach. Other investors perceive that, like other areas of human activity, investment should be informed by ethics.
The non-moral view, in the tradition of Hayek, Rand and Friedman, sees the purpose of business as wealth creation (and in Rand’s view, the accumulation of wealth in the hands of the ‘talented’ constitutes in itself a social good). Investments are assessed by analysing the cost – such as impairment of cash flow and loss of capital – against the benefit to the investor. The law establishes what is allowed in business and sanctions the activities it judges harmful to society. Thus today the investor is essentially free to do anything that is not illegal.
But sanctions may be weakened by special interests and made trivial. For non-moral investors, illegal acts by a company may thus be not only acceptable but even desirable – if the profits outweigh the fines. Senior management, who may have benefitted from the breach, may be unaffected. Finally, the law may lag. Unethical actions, like buying up obscure pharmaceutical formulations and jacking up the price in ghoulish disregard for patients with no alternative, are not only seen as acceptable but as ‘great business models’ by some investors.
The ethical view, on the other hand, which was mainstream before Ronald Reagan and Margaret Thatcher endorsed the pursuit of self-interest (or greed) as good, is now seen by some as quaint. In this view, the purpose of business is, through commercial endeavour, to improve society. Investing for returns is very important, but the ownership of companies involves some responsibility for their actions. The legal shield of a corporate structure does not absolve an investor from the moral responsibility for the means through which their return is generated.
Both views contain complexities. Framing ethical considerations as ‘risks’ is comforting but may represent an abdication of responsibility: buying the stock of a polluting company supports the share price, lowering its cost of capital and making it easier to expand. How much return, if any, are end-investors like you and I, who are happy to recycle household waste and buy a hybrid car, willing to forego for the sake of responsibility in our personal portfolios? If a fund manager outperforms, we don’t query their pick of ‘sin stocks.’ Acting like a responsible owner and calling management to account is difficult and time-consuming, requiring specialist skills and experience. It has more clout if investors’ holdings are aggregated to reinforce engagements. Consequently, it is available only to the largest and most sophisticated investors.
The environmental and social costs of our consumption will likely seem shocking to future generations, just as the slave trade horrifies us. Both are terrible distortions of two vital relationships that humanity has: with our planet, and with each other. As professional investors, being aware of this damage is part of managing risk. But engaging companies to ameliorate this harm is part of being a responsible human being. The two identities do not need to be, and should not be, separate.
QE - when the solution becomes a problem