Ethical investing - putting your money where your mouth is

What are your thoughts when you pass on that donation to a charity or homeless chap? If you're anything like me, you probably internally justify that you contribute in other ways. Perhaps you volunteer annually for the animal shelter. Or maybe it's more ad-hoc - leftovers from the odd food court meal to the nearest homeless woman outside.

The truth is that many of us are now desensitized by the overload of visual stimuli caused by serious societal issues. Although I currently reside in one of America's most progressive cities, the first impression of many visitors are the number of desperate people living on the streets of San Francisco.

(Almost) all of us truly want to make a positive difference in life. Direct contribution (e.g. charity) or indirect contribution (e.g. conscious consumption) are the obvious outlets. But the unfortunate reality is that whilst well-intentioned, many of our decisions stem from emotional biases. Social organizations such as Effective Altruism are making truly great strides, but much remains to be done in accessing mainstream decision-making.

One important decision where we all can make a lasting impact is how we invest our money. A little over two years ago, $1-in-$9 of professionally managed funds in America was invested in sustainable and responsible investments. Today that figure is closer to $1-in-$6. Considering that there are $36.8 trillion invested assets in the United States (Cerulli Associates), this statistic is incredibly impactful.

Driving the rapid growth in sustainable and responsible investing is the reality that impactful investing and strong financial performance are not mutually exclusive. A Harvard Business School working paper1 on corporate sustainability concluded that companies with superior performance on material sustainability issues actually outperform companies with inferior performance on material sustainability issues.

This all sounds a bit too good to be true: invest ethically and be rewarded financially. So let's take a step back and think, well, what really are sustainable and responsible investments? Or perhaps more pertinently, consider the converse: what is not a sustainable or responsible investment?

I heard a great anecdote recently regarding one particular fund manager's thoughts on this issue. This individual was proudly boasting his fund's focus on investing in ethical companies and funds. Investors lauded the manager - strong returns and impactful investing. Brilliant. Upon closer inspection one diligent fund investor was right to query why one of the largest holdings in the fund was an African tobacco company. Seemed contradictory. The fund manager's response was a classic business-school-like one-dimensional response: the tobacco company is one of the largest employers in the region and therefore is acting in a responsible manner. That is, disregard the well-established fact that tobacco use is unequivocally bad for the health of society and its members. And perhaps worse, the array of other investment decisions that could be made on a similar justification makes your mind spin. My goodness.

It is such decisions, which really make you stop and think: what are my savings invested in? Your invested savings are one of the largest indirect contributions you will make to the world. You will comfortably (and rightly) pay a premium to purchase shoes, water or coffee from sustainable sources, but have you stopped to think where your thousands of dollars of retirement savings are really being invested? Put your money where your mouth is, ask your financial advisor (or check your online portfolio) and be very sure you're comfortable with what you're investing in. Because even the best intentions can... go up in smoke.

1 Mo Khan, George Serafeim and Aaron Yoon. Corporate Sustainability: First Evidence on Materiality. HBS working paper, 2014.