Whenever people discuss investing in financial markets, or even in assets like real estate or businesses, greed — or the want for an increasing amount of wealth beyond what we need to sustain a comfortable life — is not only central but is the accepted rationale. We spend all this time trying to understand where to put our money with the purpose of making ourselves richer, to achieve a lifestyle we see possible from other people who managed somehow to get the big bucks by making either smart or lucky investment choices. But in my previous column, I had explained that not all people are motivated by greed and becoming richer. Believe it or not, some people have other things in mind when they imagine a meaningful life and invest according to these principles. But with finance having suffered such a reputation of being a primary vehicle for luxury and excess, we have forgotten that this industry serves many purposes — even, surprise, surprise, addressing social issues.
We call this Responsible Investment (RI), i.e., when we consider things apart from financial return important when we put our money somewhere. Over decades, such “non-financial” returns have been defined and over-engineered with terms like “triple bottom-line” (people, profit, planet), “inclusive finance,” socially responsible screening, ESG (environmental, social, governance), “ethical investing,” and the terms go on. But the bottom line is that there has existed for centuries prior, a form of finance which has always gone beyond the myopic performance story. And it is not just a niche for the holier-than-thou people who want to change the world; it’s the basis of finance, and always has been.
Religion, like it or not, has had a strong influence in the development of cultures and creating ethical codes for society and the same has been true for investments. Religious congregations in America and the UK used investments to address their ethical concerns in society by excluding controversial businesses from their portfolios. This type of ethical investing has ancient Greek, Jewish, Christian, and Islamic roots.
The Torah, for instance, provides some rules on how money must be used whereas the Catholic Church prohibits usury. As early as the 1700s, Quakers prohibited their members from participating in investing in the slave and weapon trade, and during the same period, the founder of Methodism John Wesley preached a sermon calling on its faithful to avoid investing in companies engaged in alcohol, tobacco, gambling, and weapons. Following the rules enacted by the Koran, Muslim investors have historically avoided investing in companies involved in pork production, alcohol, gambling, and in interest-based financial institutions.*
From the 1960s, the attention started shifting away from religious motivations and a spotlight was shed on pressing societal events. During the Vietnam war, students led a protest and called for the boycott of companies providing weapons used in the war. This brought about the birth of the Pax World fund in 1971, which avoided investing in companies significantly involved in the manufacture of weapons. The rise of the civil rights and racial equality movements in Europe and the US through the Civil Rights Act in 1964 and the Voting Rights Act in 1965 increased the pressure on companies operating in South Africa during the reign of apartheid. Investors were eventually forced to withdraw investments in these firms. Massive environmental disasters including the 1986 Chernobyl catastrophe in Ukraine and the oil spill of the Exxon Valdez near Alaska made companies more aware of the consequences of environmental risks on their revenues. These critical events brought society’s attention towards how money is invested and how it could be used for both negative and positive social ends and cast a spotlight on the financial sector as instrumental in bringing about solutions to such massive societal problems.
In the first half of the 2000s, the Parmalat fraud and money laundering scandal of its CEO and top managers in 2003 and the audit scandal which led to the collapse of Enron in 2001 severely affected pension and mutual funds in Europe that invested in these companies and highlighted the need for better governance controls, which was exacerbated even more during the 2008 financial crisis. The crisis provided legitimacy to ethical funds since these funds had done more in-depth research and to some extent were divested from risky companies, making the practice of looking at non-financial issues particularly attractive to the mainstream.
In Europe, several countries have been able to implement RI through supportive legislation at a local level. For instance, Belgium, France, and Italy have prohibited the investment in companies producing weapons. More popularly, Norway’s “Petroleum fund” has prohibited investments in tobacco since 2004. According to the European Social Investment Forum, tobacco features as the most popular exclusion criteria, reflecting a wave of divestment. The number of signatories to the UN Principles for Responsible Investment (PRI) who vow to improve asset management practices is currently close to 2,700 firms, representing the management of over $104 trillion globally (PRI Website).
So, if you think you are alone in believing your money could serve better ends, fret not. We have a long way to go in rethinking finance as serving the needs of society — but there is a slow and steady movement underway, which we simply need to jump on. n
*A list of references is available from the author upon request.
Daniela “Danie” Laurel is a business journalist and anchor-producer of BusinessWorld Live on One News, formerly Bloomberg TV Philippines. Prior to this, she was a permanent professor of Finance at IESEG School of Management in Paris and maintains teaching affiliations at IESEG and the Ateneo School of Government. She has also worked as an investment banker in The Netherlands. Ms. Laurel holds a Ph.D. in Management Engineering with concentrations in Finance and Accounting from the Politecnico di Milano in Italy and an MBA from the Universidad Carlos III de Madrid.
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