Ethical investing, or ESG, has been a trend that has soared in popularity in recent years. Although ethical investing isn't quite the buzz phrase that it was perhaps back in 2021, many investors still like to 'invest with their values' and seek out ethical ASX shares that seemingly align with this philosophy.
Now, I think that sentiment is admirable. After all, we all want to see a better world, and if we can invest in ethical ASX shares and make a difference for the good of the planet, why wouldn't we?
Well, unfortunately, I don't think it works that way. And as such, I don't usually incorporate ethical considerations into my investing thesis.
There are a few common misconceptions that I think feed this narrative.
The first is that when you buy a company's shares, you are giving that company money (and by selling them, you are taking money away).
This is misguided. Our stock market functions as a secondary market. We don't buy or sell shares from the company itself; we buy and sell them from and to other investors. So when you buy a share, you are just paying the person who owned it before you did. The company itself isn't involved at all.
Follow the money
It's similar to buying a second-hand car. When you buy an old Ford from your neighbour, for example, the Ford Motor Company doesn't take a cut of the deal. It's not even involved at all.
Of course, this isn't the case if you participate in an IPO or a capital raising program. At that point, the company is involved a little more directly.
So don't think that selling a company's shares that you no longer view as ethically pure damages that company's fortunes. Its impact is probably negligible.
That's because all of that company's stock is fixed in number. You can't sell a share unless someone buys it from you. If you don't own shares, someone else will.
Secondly, many investors believe that if enough people refuse to buy an unethical company's stock, it will damage the company.
Many managed funds and exchange-traded funds (ETFs) actively exclude a number of industries from their investable universe (and usually charge you for the trouble). This often includes companies involved with the production of tobacco, weapons, uranium, or gambling services.
This can indeed have a depressing effect on a company's share price but not on its underlying fundamentals.
If a company makes $1 billion in profits per year from selling guns or cigarettes, bringing down said company's market capitalisation from $10 billion to $5 billion or even $1 billion won't change that fact. Conversely, it will make for a more lucrative investment for those investors who do want to buy those shares.
The company can always buy back its own stock, too, which again will prove lucrative for the company if its share price is artificially suppressed.
Why buying 'ethical' ASX shares isn't as good as it sounds
The only thing that truly damages a company is if its customers stop buying the products it sells. Not its shares. In fact, you have a better chance of making a positive impact by buying an ethically dubious company's stock, and going to their annual meetings and voicing (and voting on) your concerns.
A few years ago, our chief investment officer, Scott Phillips, shared a similar sentiment:
You're not giving money to the company. You're simply exchanging an existing ownership interest with someone else.
Whether you buy those shares or not, they'll still exist. The company doesn't know, or care, whether or not you own it. It'll mine the same amount of coal, sell the same packets of cigarettes and own the same number of pokies, regardless of who is on the share register…
Investing in companies or funds just because they are 'ethical' might make you feel better, but that's unlikely to have a tangible impact on the world.
So I don't usually take these ethical considerations into account when I purchase stocks. Do I think the world would be a healthier place if we collectively drank less Coca-Cola? Absolutely. But I don't think that's going to happen, and so I still own Coca-Cola Company stock.
Investors should all look to make the world a better place. But knowing exactly what makes a true impact is the most important thing to keep in mind.
