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Ethics man. God, mammon and investing

February 9th, 2020

Those snowflakes are at it again.  Students of St John’s college, Oxford, have called upon their college to disinvest from companies that extract fossil fuels and thus contribute to global warming.  In response, the principal bursar has told them that could not be done at a drop of a hat, but he’d gladly turn off the gas in their halls of residence if that would make them feel better.  It seems that it would not.

Contrary to the implication of the principal bursar’s sneer, it would be entirely possible for the college to disinvest from fossil fuel companies if it wanted to, and to do so quite quickly if the will was there. It presumably simply does not want to.  

Scrutinising the origin of funds is not a recent activity.  The Emperor Vespasian caused murmurs of disapproval when he taxed the urine from Rome’s public conveniences, which was used by tanners.  Part of the revenues of the Bishop of Winchester in the Middle Ages came from brothels in Southwark – in Henry VI Part 1, the Duke of Gloucester accuses him with the words “Thou that givest whores indulgences to sin”.   Both faced down their critics. Vespasian wafted away the criticism, and the smell, with the sentiment: “money has no odour”. Those medieval sex workers were called “Winchester geese”.

Investors talk a better talk these days.  Not all of them walk the walk. How can campaigners ensure that they do well by doing good?

You won’t stop investors putting money into something that will produce good returns consequence-free.  So anyone who is perturbed by the activities of some companies and who wants to choke the supply of capital to such companies will need to reduce the returns that these companies produce or increase the negative consequences of investors seeking them from these companies.

Many campaigners, including St John’s students, have turned their attentions to the investors.  In the past some have taken this to extremes: investors in life sciences companies have been the targets of terrorist attacks from extreme animal rights activists.  Currently, fortunately, most campaigners are working within the law.

Private investors can do as they please.  Those who hold funds on behalf of others, however, whether charities, pension funds, or Oxbridge colleges, are constrained by legal duties as to how they invest.  So they need to look over their shoulders.

Classic statements of the law are Vespasianic.  Trustees, we are told, should act in the best interests of the beneficiaries as a whole, holding the ring between different classes of beneficiaries.  They should approach this from an investment perspective, with the rider that trusts may have regard to wider considerations affecting the particular trust – so cancer research charities can properly rule tobacco stocks off limits.

It is unfortunate that the legal guidance we get depends on the cases brought.  The tone was set by a pensions case brought by Arthur Scargill, who chose to argue his own case in court.  Even the judge later admitted that he might not have been quite so trenchant if the case for the miners had been argued with more legal expertise.

In recent years, there has been a growing appreciation that investment aims and ethical concerns do not need to be in opposition to each other.  With that in mind, the government has been focussing on ESG (environmental, social and governance) considerations, making pension schemes, for example, disclose in detail how they take these matters into account in their investment strategy.

I regret that the government chose to label ESG in that order.  If the first item had been governance, the public could much more easily see how that was relevant to investment decision-making.  A company without proper controls is easily understood to have investment risks.

Instead, all the attention has been grabbed by “environmental”.  That makes people think of Greta Thunberg hugging a polar bear, when it is really more about the externalities of company behaviour and how sustainable they are, given the likely regulatory responses.  Investing in car manufacturers that make only petrol and diesel engines now looks to have a relatively short shelf life as a strategy, as the market moves to electric.

These are matters that the investment managers have been looking into for a long time, though they have not done so in a particularly structured way until recently and many of them still struggle to express their approach in a single overarching statement when asked.  As a matter of common sense, however, if you are looking for long term returns, you need to look at long term risks.

Those concerned about the impact of corporate activities should take note.  If activists put their energy into making companies accountable for their external impacts, those companies would become correspondingly less – or more – attractive investments as a necessary consequence.  It would also, more importantly, tackle the concern about their activities at source. 

One simple way of doing this would be by modifying the rules about remoteness of damage.  If statistical evidence were sufficiently robust to show a causal link between a corporate activity and a harm (public or private), why should the company not be expected to pay for its contribution to that harm?  At present that is an incredibly stiff challenge and the courts are quick to find that intervening acts (such as the decisions of consumers) discharge such companies of any legal responsibility. The courts handle the use of statistical evidence in employment cases when considering whether there has been indirect discrimination.  Why not do so here too?

This idea need not be confined to those companies whose activities contribute to global warming.  Fast food companies might need to help pay for clearing up litter. Personal loan companies might need to deal with the consequences of too easy credit.  Bookmakers might need to help pay for the consequences of gambling addictions.

All this would of course need campaigners to win a political debate.  That, however, is surely right. If policy is to be changed in any of these areas and to see a cultural shift in the view of corporate responsibility, it should be done through the front door.  Guilt-tripping investors without directly debating the public policy question is only going to get campaigners so far.  

Alastair Meeks