Could Trump be right about… ethical investing???

Many of you will have seen Trump’s announcement essentially trying to prevent pension funds from considering ethical issues for investing. To quote The Australian:

After a remarkable run of success in the investment sector, ethical investing has received an unwelcome jolt from the US government with a Trump administration proposal to remove so-called Environmental, Social and Governance (ESG) investments from retirement funds.

With the policy-making US Department of Labor controlling funds representing one-third of the entire US sharemarket – the announcement has sent shockwaves through the global ESG sector.

With funds of $US9 trillion ($13 trillion) under its control, the US Department of Labor says that fund managers acting on behalf of American workers should only follow “objective risk criteria” when buying stocks and bonds.

In essence, the proposal puts forward a hardline traditional view of investment objectives where the sole purpose of retirement funds is to make money for members.

Declaration of interest

Now, I’m not unbiased in this debate. We run tailored ethical funds, where investors choose from 30+ types of companies to exclude from their portfolios. About 2/3rds of our clients have selected at least one ethical option.

As strange as it may sound, I’m lining up with Trump on this one. Well, maybe not “with” with him, I do think his proposal is motivated by trying to help his coal and oil mates. And is probably partly designed just to prompt outraged headlines in left-wing media. And it puts unnecessary regulatory measures on genuine ESG funds. But there is an element of truth to Trump’s concern.

And let me be clear, I’m not saying that there should be no ESG funds. If investors choose to invest in an ethical fund, then that is fine. But an ordinary investor who chooses an ordinary superannuation or retirement fund shouldn’t find out that those funds have started making non-financial ethical decisions on behalf of investors. 

Trump is wrong about the G in ESG investing.

Trump’s actions as president clearly suggest he doesn’t think governance is an issue. I disagree. Investors should absolutely consider corporate governance issues before investing. There are clear performance benefits.

The E & S are different.

It is my job as an investment manager to make profitable investments for my investors. These decisions should absolutely take into account the long term prospects and possible negative impacts of Ethical and Social considerations for particular sectors.  

Suppose I think killing your customers (tobacco) or your planet (fossil fuels) will limit a company’s investment prospects. In that case, I should put that into my investment assessment.  

However, I don’t believe it is my role as a fund manager to arbitrate the ethics of legal products. Some people think tobacco is horribly addictive and unethical, but gambling is each person’s own choice. Others have exactly the opposite view. 

For most ethical funds, you can either have both sectors or neither, regardless of your view. My goal is to give every investor the broadest possible opportunity set. So we run every investor and superannuation client through a separately managed account where they can make these choices for themselves from over 30 different options. For example here are our climate change ones:

ESG ethical investing climate change options

Investors: don’t stop there

I want investors to tick a box and exclude investments from their own portfolio if they feel strongly about an issue. It is a positive step. But it is only a very small step. There are much better ways to help.

Say you are concerned about climate change:

  1. Make a donation. See here or here for some options. 
  2. Lobby regulators or legislators. Donate your time to lobby boards and legislators. Here is a list of countries with dates to phase out fossil fuels:
    Fossil Fuel Bans
    Getting your country on that list, or reducing the time to phase out will have far more effect than convincing a fund manager. 
  3. Boycott the product Companies care more about people not buying their products than they do about you not buying their shares. It makes no sense to refuse to buy an oil company’s shares if you use their fuel every day.

Don’t get me wrong, I want you to avoid buying shares in companies where you don’t agree with the ethics.

But if you truly want to make an impact, don’t stop there.  

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Damien Klassen is Head of Investments at the Macrobusiness Fund, which is powered by Nucleus Wealth.

Follow @DamienKlassen on Twitter or Linked In

The information on this blog contains general information and does not take into account your personal objectives, financial situation or needs. Past performance is not an indication of future performance. Damien Klassen is an authorised representative of Nucleus Wealth Management, a Corporate Authorised Representative of Nucleus Advice Pty Ltd – AFSL 515796.

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Comments

  1. Which reminds me, how do I set the unethical options in my fund? How can I select arms dealers, drugs and vice?
    I’m long chaos and misery.
    ;p

    • for sure,
      when you see that guns sales have increased by 95% in US from last year and ammunitions by 130% LOL

  2. I would only invest ESG to follow a trend as if funds start to massively avoid some industries, these stocks value will automtically suffer.

    But personally, as I like plants I like CO2 😉

  3. … shouldn’t find out that those funds have started making non-financial ethical decisions

    I would not deal with any brokerage that made non-ethical decisions, no matter the financial considerations. Investing in fossil fuels or tobacco, for instance, would immediately disqualify your company.

    Your statement that “there are much better ways to help” than directing funds away from destructive investments is asinine in the extreme. 🙄

    • Damien KlassenMEMBER

      Well done! I know you are just trolling but I’ll bite anyway.

      So two people both want to do something about climate change. Person A refuses to buy oil or coal stocks but has 2 petrol cars, gas heater, gas stove and gets electricity from the grid, coming from coal fired sources. Person B uses solar power and batteries and owns an electric vehicle but makes no ethical investment decisions.

      Which of these people is helping the cause more?

      Which other ethical decisions do you want your manager to make? Is nuclear power going to save the world from carbon or is it a dangerous technology? Should we avoid companies that test medical products on animals, causing death and pain to those animals, or should we buy them because it will help develop much needed medicines for humans, and it is more humane than testing on humans? Are contraceptives an abomination against God or a useful way to empower women (and men) to choose when to have children? Should you buy companies in Japan because they are a peaceful, democratic country or should you avoid them because they have an insignificant amount of women on their boards? Is alcohol a legal drug that a majority of people use or a scourge on society / affront to God? Is gambling an acceptable, legal form of entertainment or a tax on the poor and preys on addicts?

      You seem to suggest that there are black and white answers to every question that a fund manager should be able to work out on your (and every other investor’s) behalf. I disagree.

      • Which of these people is helping the cause more?

        That’s easy, Damien: Person A. Why? Because the impact of his investing is much higher than his personal emissions. If people invested like Person A en masse, the game would be over for fossil fuels — and very very quickly too.

        s nuclear power going to save the world from carbon or is it a dangerous technology?

        Nuclear power investments would simply be bad investing. Ask DLS, he knows that it cannot compete with RE.

        Should we avoid companies that test medical products on animals

        No, but some investigation is required as to what is being tested, and in what way. Not all animal testing is cruel, and not all animal testing is necessary. IOW, do your job.

        Are contraceptives an abomination against God

        Come on, you’re grasping at straws now. A vanishingly small number of people object to contraception in this day and age, and those that do are usually hicks without two cents to rub together, so won’t be crossing your path.

        Should you buy companies in Japan because they are a peaceful, democratic country or should you avoid them because they have an insignificant amount of women on their boards?

        Not an issue I care about, but as you’ve correctly indicated, a questionnaire to each investor would be appropriate. This also applies to your other postulated questions.

        In the end, investing in fossil fuels is a threat to your and your childrens’ future, and I’m sorry to see that you don’t grasp that, and show the sort of moral fiber I’d expect from an intelligent human being.

        And btw calling me a troll because you don’t like my message does not reflect well on you either.

          • If you enjoy my comments and want to see more of them, feel free to buy me a membership. I won’t do it directly because I can’t think of a way to do it completely anonymously

        • Damian is essentially arguing something akin to the Trolley Problem.

          Every choice hurts someone. Which one is right?

          They’ve tried as best they can to defer that judgement to their clients – which is a fair call.

          My morals are not your morals. Nor are they anyone else’s.

          • My morals are not your morals. Nor are they anyone else’s.

            At least on the issue of fossil fuels, all sane, intelligent people should be able to agree.

          • This is what gives me the irrits. All “sane, intelligent” people.

            Buddy – I am pretty intelligent – graduated with honors from one of the top ivy league unis in the States which was itself pretty hard to get into, I am smarter than the average bear and there’s a good chance that means you as well. I’ve had a shrink provided by my firm (high pressure gig) and am clinically sane. And I would have no problem investing in a fossil fuel company if the return was appropriate.

            I also know a few fund managers who would do exactly the same (and they are similarly sane and intelligent).

            Just because someone disagrees with you doesn’t mean they are a deplorable. Unless you are Hilary Clinton.

            If people stop investing in fossil fuels the company doesn’t go away – it just becomes cheaper and more profitable for those who see the opportunity.

          • I would have no problem investing in a fossil fuel company if the return was appropriate

            Well of course — sociopathy is common in the business world.

            There are plenty of sane, supposedly intelligent people who also have no moral compasses. But in my book *true* intelligence encompasses a moral compass, includes a sense of appreciation of the natural world, and a concern for coming generations.

            Just because someone disagrees with you doesn’t mean they are a deplorable

            You’re not disagreeing with me, you’re disagreeing with the entire world of science. That’s why I question the “intelligent” and “sane” part.

            If people stop investing in fossil fuels the company doesn’t go away

            If companies cannot get investments, they die. Banks won’t fund them.

            https://en.wikipedia.org/wiki/Fossil_fuel_divestment

  4. Unless I’m understanding him incorrectly, who on earth does Trump think he is telling people where they can’t invest their savings??! Maybe people should tell him where to go?

  5. Isn’t this a straw man argument. The issue the Trump administration has is aimed directly at ESG funds themselves where investors get to participate and actively exclude (or include) certain sectors. It might be the case that you entered a fund where the manager has a certain personal ethical bias towards (or away) from some stocks without your awareness but no one made that argument and is a separate issue. The argument the Department of Labour is making is that they are offering these ESG funds at all to informed clients and on that basis I disagree with their decision. A person should be able to choose whatever stocks they want to invest in regardless of the reason, even it it makes them less money.
    There is also the very real possibility that the next target they aim at is that US funds can only invest in US companies. They are already talking about delist Chinese companies from the nasdaq.

  6. I must admit, the actual change here is not clear. ESG factors clearly go to investment risk over and above a feel good factor. And if you say you are taking ESG factors into account then presumably your investors are cool with that.

    So what exactly is the change?