The challenge seems insurmountable. Is there a consistent, rigorous, ethical investment philosophy that we can all agree on?
With the rapid rise in interest in socially responsible investing, financial advisors have been thrust into the unenviable position of needing to address questions of values and ethics in portfolio management. Understandably, the most common response is to defer to the client, given the incredible variety of “sustainable” strategies and approaches to choose from. Encouraging clients to choose for themselves what ethical issues they want to account for when they invest punts the difficult philosophical questions and allows the advisor to focus on the traditional financial questions. However, I believe that investment managers who take this approach are leaving a lot of potential value for their clients on the table. Furthermore, I propose that it is possible to devise a consistent ethical philosophy that people can agree on.
Most clients are not ethical investment researchers and generally do not have the time necessary to truly dig into corporate sustainability research. By handling the bulk of the analysis and liberating clients from having to assess the possible ethical pitfalls of every investment themselves, advisors can provide a superior, more thoughtful, more rigorous approach to ethical investing. Compare that with a “choose your own adventure” ethical investing approach, led by a client that is well-meaning but ultimately too busy with other, more immediate concerns. Meanwhile, a socially responsible investment professional can take the time, as part of their day job, to peel back the layers of company analysis and provide more-informed guidance.
This of course brings us to the key question—how are advisors supposed to judge, on behalf of their clients, the impact of each corporate ethics issue? There is a simple principle that I believe people can agree on, which can guide ethical investment decision-making. It’s the golden rule: Don’t do to others what you wouldn’t want them to do to you. This principle is shared across religions and cultures the world over. Don’t make your fellow human beings suffer. The journey from this generally accepted principle to a comprehensive, consistent ethical investment philosophy is long but not impossible to travel. It just requires a lot of thoughtful research.
Every company impacts people in a few primary way—as investors, customers, employees, or members of the community more broadly. Investors can earn a positive return from their investment or conversely become the victims of financial fraud. Members of the community can benefit from companies volunteering to provide valuable services for free, or they can be hurt by companies spewing pollution into the air they breathe. Investment professionals can conduct research, on behalf of their clients, into these impacts and work to quantify them in units of human suffering or benefit.
I never said this would be easy. How many ounces of contaminated drinking water is equivalent to smoking a single cigarette? How do you compare companies across industries and product categories? How much good might a company need to do to compensate for some bad? It is, admittedly, a hard problem. It should fall, however, to advisors as well as their asset manager, ratings agency and data partners, to do the difficult work of translating ethics from abstraction into outcomes that are quantifiable.
A specific number of people get sick and die each year from drinking contaminated water, a specific number of people get sick and die each year from smoking cigarettes. These numbers are quantifiable and comparable. The relative amount of human suffering that results from these two issues provides a clue as to which issue should be given greater weight in an ethical investment analysis. Similar analyses can be done for every other ethics issue as it relates to human life and its quality. These aren’t whimsical feel-good concepts that exist in some morally ambiguous ether. There are real consequences to real people. The better we get at researching these consequences and accounting for them when investing, the more value advisors can provide to their clients not just as investors but as human beings.
Imagine a world where companies were allocated capital not only based on the potential profitability of the investment but also on the value that it could provide humanity generally. How much human suffering would be reduced? How many lives would be saved? I believe the stakes are too high and the potential for positive impact is too great for financial professionals not to take an active role in researching and quantifying these issues properly based on their human impact, on behalf of their human clients.
James Katz is founder and CEO at Humankind Investments