There's a lot of misunderstanding about ethical investment. Some people give the impression investing ethically is some murky form of sorcery that is impossible for the intelligent investor to master. This is ironic (like the title of this article), because it's actually quite easy (and not at all secretive) compared to the very difficult task of identifying great businesses at attractive prices.
In my experience, many investors apply their ethics almost by accident – I daresay almost no one can fully separate their investment decisions from their personal morals and values. It would be bold to claim your values don't impact your decisions at all. Consideration of factors other than your own profit brings ethics into the equation – and I'm glad that investment professionals are increasingly engaging with the concept. It's not a matter of absolutes – it's about incrementally bringing more value to society in our role as capital allocators.
I recently read the suggestion that Cochlear Limited (ASX: COH) could be more ethical if it sold its products as cheaply as possible (going for volume rather than margin). While I applaud anyone thinking about these issues, it is not right to suggest (even by implication) a company is unethical because its business model relies on high margins resulting from high R&D expenditure. It's possible to criticise just about any company – but that does not mean you should just give up on thinking about ethics. Who seriously thinks Cochlear is unethical, anyway? No ethical investor that I know has suggested that. It's an unusual suggestion coming from a capitalist.
Personally, I've got nothing against profit – I believe capitalism can be a force for good, although this is not always the case. The only real secret about ethical investing is that matching your capital allocation with your values may lead to a feeling of empowerment and the optimistic hope that you're making the world ever so slightly better. Here are three questions to ask if you'd like to apply your values to your shareholdings:
1) Does it make a positive contribution? One example would be Cochlear, which allows people the gift of hearing. Not only that, but the company has been a leader in the field – many people who use competitors' (cheaper) technology also owe a debt of gratitude to earlier inventions funded by Cochlear.
2) Does it do unjustifiable harm? This is always very debatable. In my opinion, a company that creates an extremely long-term liability for future generations, such as Paladin Energy Ltd (ASX: PDN), with its uranium mines, is doing unjustifiable harm. However, other people think nuclear is a great replacement for coal. Another example would be Malaysian property developer United Overseas Australia Limited (ASX: UOS) which turns slums into flash new buildings. Personally, I can live with that, but there's no denying that it's up to the individuals and perhaps one day I'll think differently.
3) Does it display comparative superiority? A good example of this is that Westpac Banking Corporation (ASX: WBC) prioritises social responsibility and lends less to coal miners than does Australian and New Zealand Banking Group (ASX: ANZ). For some, this makes it a better choice, and for that reason, Australian Ethical Investment Limited (ASX: AEF) has historically held shares in Westpac (and before that, St George).
The point of ethical investing is not to be perfect – indeed, it's often enormously difficult to know what is for the best. The point is to try to make sure that every day, your hard-earned dollars work towards a world you want for your children. While imperfect, the effort itself (when undertaken seriously) is very likely to shape a better world, in my view at least.
The role of capital allocators is to decide where capital is invested – some consider only profits, others consider environmental and social factors too. The latter is an ethical investor. However, many fine human beings do not practice ethical investing. Rather, they contribute generously to society in other ways (Warren Buffett is a famous example). That too, shapes a better world. Little harm is done by a desire to leave the world a better place.
