Aug 19

Is It Possible To Be An Ethical Investor?

Ignited by Milton Friedman’s 1970 famous piece in the New York Times entitled, “The social responsibility of business is to increase profits”, the unresolved question of ethical investing has been moot for more than half a century. I suspect many business leaders of Friedman’s day had not even considered the question and became even more dismissive of any social responsibility overlayed on their business profit-making during the rampant ‘greed is good’ 1980s. But what is often lost on both the ‘Gordon Gecko’ reading of Friedman’s piece on the one hand and by ‘Motherhood and Apple Pie’ social activists on the other, is Friedman’s important explanation and caveat to his statement.

The explanatory logic of the Friedman thesis is that corporate executives are employees of the owners of the business, namely shareholders. As such, engaging in corporate social responsibility activities on behalf of the company amounts to spending money that is not theirs, but rather that of the owners and shareholders. Moreover, Friedman contended that spending the money of shareholders on social responsibility programmes not only came at the expense of shareholder returns but actually resulted in reducing the amount available to pay wages and increasing costs to consumers.

For Friedman, executives, employees, shareholders and customers are free to spend their money on social responsibility programmes, but not each other’s.

As the owner of several successful South African and international financial services companies, I am perfectly clear about my corporate social responsibilities, which are channelled through the independently governed Spirit Foundation (www.spiritf.org). Falling under the umbrella of the Spirit Foundation is housed the Spirit Education Foundation, the Spirit Community Foundation and the Spirit Wildlife Foundation. Notably, all companies within the Spirit Group donate and contribute to the Spirit Foundation.

What is less clear, however, is the question of ethical asset management investment. In other words, in addition to value, growth, dividend policy and profitability questions, should ethical considerations be taken into account when investing? In addition to the historical sin industries such as liquor and tobacco, we are now faced with ethical investor dilemmas regarding highly profitable industries such as mining, oil and gas, that demonstrably pollute and contribute significantly to climate change, yet are essential to modern existence.

Russia’s invasion of Ukraine raises significant questions regarding the ethics of defence and armaments sectors. Here the line is even greyer insofar as the ‘products’ manufactured by these companies can be used for both defensive and offensive purposes. Relatedly, and even more challenging, are questions regarding investing in airline manufacturers such as Airbus and Boeing, whose products are used for both commercial and military purposes.

Gambling companies, and particularly highly profitable online gaming companies, present a burgeoning dilemma for ethical investors. While we may not have given gambling-related industries such as horse racing or hotels and resorts much of a second thought on ethical grounds, the growing presence and power of online gambling companies present a different quantum of challenge. Not only are these companies becoming omnipresent advertisers across a host of sports, but, given their ease of access, in essence, every home with a computer, or every person with a smartphone has access to a casino just one click away.

So, while we have made tremendous progress with respect to corporate governance through soft laws such as the respective King Codes, we are still some way away from developing effective codes that help us to navigate our way through the numerous challenges to ethical investing.