Ethical investing has moved from being fringe a decade ago to mainstream today. Yet with different approaches and different terms used, many investors don’t know where to turn.
In this column we want to demystify things by answering reader’s queries. This week’s question comes from Matt.
Question: If I avoid investing in a company with harmful practices, can I ever invest in it again? How will I know when it has changed?
Some companies land themselves in severe controversies. These aren’t just run-of-the-mill infringements, but serious breaches with public outrage. These may involve environmental impacts, human rights violations or governance failures like accounting scandals or corruption.
For multinationals, the backlash can be global. Don’t expect this to have been caused by the mistake of one careless individual. More often it can be traced to issues with a company’s culture.
BP Deepwater Horizon did not spew 4 million barrels of oil over 87 days into the Gulf of Mexico, and cause 11 worker deaths, because of one low-level operator’s mistake. It was a broader failure of safety and systems planning within BP’s decision-making.
Rio Tinto did not blow-up a 46,000-year-old Aboriginal site by accident. There was a leadership vacuum around cultural values.
AMP’s unethical behaviour uncovered by the Australian royal commission wasn’t caused by a rogue bank teller, it was enabled by the organisation’s culture.
An ethical investor may already avoid fossil fuel companies like BP, but a severe controversy can happen in any industry. Take Nike in the 1990s. The company almost collapsed when it was widely publicised that its supply chain used child labour.
For a time, consumers didn’t want to buy Nike shoes and investors didn’t want to go near it.
These severe controversies not only cause public outrage, but financially harm a company and it’s shareholder returns. Deepwater Horizon cost BP around US$100 billion.
‘Group think’ may have taken over, meaning the boundaries of what’s acceptable shift or aren’t challenged. Divisional managers may be fearful of not meeting quarterly budget targets. Control functions within an organisation may be undermined by top leadership.
With cultural or leadership issues, it’s unlikely there’s just one isolated event. Expect further violations.
Volkswagen had ‘dieselgate’ – the emissions cheating scandal. This wasn’t a one-off. It was later revealed that Volkswagen conducted bizarre car-exhaust experiments involving humans and monkeys.
Facebook had massive issues with data privacy, but it’s Cambridge Analytica scandal wasn’t a one-off. More problems surfaced around fake news, lack of livestreaming controls and product addiction.
Over time, companies can make dramatic improvements. Nike put its supply chain in a spotlight and lifted its game.
A press-release apology and a new company policy alone won’t fix these problems. What’s needed is ownership of the problem and leadership change. Chief executives at Volkswagen and Rio Tinto were forced out. AMP’s board chair and chief executive stepped down. Organisation-wide changes can then follow.
Let’s directly answer Matt’s questions. If I avoid investing in a company with harmful practices, can I ever invest in it again? The answer is yes, provided it has undergone serious and lasting change.
How will I know when it has changed? Change should most likely start with public acceptance of the issue, owning the problem and senior leadership change. Turning around a cultural issue in any organisation is, however, rarely a quick and simple fix.
– John Berry is co-founder and chief executive of ethical fund manager and KiwiSaver provider Pathfinder Asset Management, the first B Corp certified fund manager in New Zealand which is part of Alvarium Wealth.
(This article was originally published by Stuff September 30, 2021)
(Photo by Michael DeMocker, The Times-Picayune)
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