Investors rarely think about how their investments really affect them other than on a financial basis. Though some might incorporate sustainable investing or avoid tobacco stocks etc. for other and/or personal reasons. But looking deeper, investors would realise that all investment actions create numerous effects on the world around us. Just as a pebble thrown into a pond creates ripples throughout the pond, so the accumulation of numerous individual investment actions ultimately affects the lives of many people in both good and bad ways. As in physics: ‘for every action there is an equal and opposite reaction.’
Similarly, all major religious traditions have sayings that express how all our actions can come back to affect us. Christians believe, ‘as ye sow, so shall ye reap.’ The Muslims’ Quran says, ‘whatever affliction may visit you is for what your own hands have earned; and He pardons much,’ and for Hindus, Buddhists and Jains are the ‘laws of karma’ where the individual experiences the results of past actions.
Thus, the investor’s personal or spiritual development, as well as the quality of life for the world as a whole is affected by the investors’ investments. So in a subtle way, investors share in the responsibility for the activities of the companies they invest in, as well as participate in some way in the outcomes of the corporate actions of the companies they invest in.
Those investors who believe themselves ethical and moral individuals—and very few would argue they are not—therefore, have a responsibility, as daunting as it is, to try to place their investment funds into companies and organisations that offer ‘all good’ returns. These are returns that are not only financial in nature, but which also benefit, and not harm, the lives of others and the world around us.
Of course, this is not an easy task! And it sounds absurd to many investors to even attempt to do this. Critics are right to say that even the stocks of Enron and WorldCom, where both companies became bankrupt after evidence of immense fraud, were once considered good ethical investments. But ethical investors who invested in such stocks may argue that it was a lack of full, transparent, and timely disclosure of their corporate affairs that played the major role in deceiving them.
The huge challenge for ethical investors—and all investors—is to obtain up-to-date transparent and honest information concerning any public company’s activities. This is why I am an ardent supporter of financial statements that reflect actual market values versus computer modeled fantasy values that are now used for valuing many assets, and for mandatory corporate social responsibility (CSR) reporting for all stock exchange listed companies. (See my June 9 column, A Call for Mandatory Corporate Social Responsibility Reporting.)
Personally, until financial statements show real-time market values and high quality CSR reporting becomes the norm globally, I would welcome the creation of a WikiLeaks that focuses on corporate misdemeanours. Such a development might finally spur investors and regulators everywhere to demand full, timely, and transparent disclosure of everything that might affect an investor’s investment decision. Otherwise, it is impossible for investors to assess the profitability and value of any company. I find it stunning the silence of investors on these issues.
Of course what is considered an ethical company by one investor may not be by another. I know some investors who believe defence stocks are also ethical investments, while others would strongly oppose. Some investors invest in precious metals as they hold that the only real money not subject to government or central bank money printing and deceit are gold and silver. So ethical investing does not necessarily mean only investing in a few select industries or companies that are deemed to hold some superior ethical stance.
But the innate desire for high ethics is universal among investors, whether they be Christian, Muslim, Hindu, Buddhist, Jain… or atheist! High ethics can be defined as including honesty, transparency and integrity in one’s dealings with others. If enough investors apply their higher ethics to their investments—and so demand from companies and regulators the kind of reporting that high ethical standards require—then it could reverberate in corporate boardrooms around the world. This is not a utopian ideal. In fact, it is already demonstrated.
Studies reveal so-called ‘best-in-class’ companies generally exhibit higher than average ethical standards while usually offering relatively superior stock market returns compared to their competitors. For more on this see my July 19 column, Can Ethical Investing Produce Higher Returns?
One last thought, in light of what I have said: ask yourself who was ultimately responsible for the recent financial meltdown. After all, in developed countries around the world, particularly in the US and Europe, investors—again, most of whom say they are ethical individuals—gave their financial elites the responsibility of their investment dollars, Euros and pounds, and the power to use those funds to their advantage. Ultimately, it was the lack of higher ethics by all concerned that created such a financial and economic disaster. Unless higher ethics are practiced by all market participants another financial catastrophe awaits us.
More investors are beginning to consider the broader ramifications of their investing activities, investing in sustainable investing, avoiding tobacco, and so on. However, were investors to look more deeply into the effects on the world that their investments produce, they would soon realise the necessity for applying higher ethics to their investments. As a consequence, they might also succeed in improving the ethics in the investment world and beyond. And that would help create ‘all good’ returns, financial and otherwise, and improve life for all of us on our fragile spaceship Earth!