A Brief History of Ethics-Based Investing

Ethics-based or moral investing, also referred to as Socially Responsible Investing (“SRI”), Impact Investing or Environmental, Social and Governance (“ESG”), is the practice of choosing investment strategies based on one’s values, ethics or morals, and has been around nearly as long as investing itself.  Investment considerations span a wide range of socially and environmentally problematic issues, from child-labour, gender inequality, nuclear power, animal welfare, toxic waste, health and safety, carbon emissions and so forth.

Millennia ago, ethical investment behaviour, broadly known today as Socially Responsible Investing (”SRI”), was often dictated by religious norms and used an elimination screen to judge investment choices.  Jewish law and tradition, for example, referred to in the Bible, considered ownership to carry responsibilities, including preventing immediate and potential harm.  Similarly, one of the teachings in the Islamic faith called Riba relates to the goal of preventing exploitation, particularly in terms of charging interest rates on lending activities.  Islamic Shariah law also ruled out investing in pork, alcohol, gambling, armaments, and gold and silver.

Religious beliefs, or faith-based investing, has dictated elimination screens in more recent centuries, as well.  The Quakers in the US, as early as the 1700s, forbade investments related to slavery and war.  And in the 1800s, Methodists ruled out the slave trade, smuggling and companies that produced alcohol and tobacco, and also businesses that promoted gambling.

Belay Station - Articles (Ethical Investing History - CNote)In the last century, around the time of the Great Crash in the stock market in 1929, the concept expanded into publicly-traded investment vehicles.  Back then, the Pioneer Fund used a form of society-wide investment screen, offering a product that eliminated the ‘sin’ industries, such as tobacco and alcohol, in the midst of Prohibition in America.  The concept continued to broaden over the ensuing decades as protestors, for example, during the Vietnam War in the 1960s demanded Funds no longer invest in defense contractors.

Shortly after, SRI came to the fore as a tool in the 1970s to influence, and even demand, significant change across the governance structure of an entire nation when most of the world withdrew their financial interests in South Africa during Apartheid.  It took until the 1990s before this form of legal racial segregation was dismantled, but the external pressure finally prevailed.  The nuclear disasters at Three Mile Island and Chernobyl, and the Exxon Valdez oil spill during that period, as well as the 1972 UN Conference on the Human Environment, broadened the acceptable investment landscape even further to include not just social issues, but also to incorporate the need for environmental sustainability.

Even with these concerns, SRI took a back-seat to shorter-term shareholder value in the 1980s and 1990s after a period of stagflation in the US and the rise of Japanese industrial competitiveness.  It wasn’t until the mid- to late 2000s, that the screening process for investments that simply eliminated certain types of industries was flipped on its head to include actively seeking socially positive investments and outcomes.  In an increasingly interconnected, globalised world with greater information flows, as well as a growing recognition of the Earth’s finite natural resources, investment attitudes had begun shifting, particularly amongst younger generations.  This has led to two variations of SRI – ESG and Impact Investing – which have become more mainstream in recent years.

Belay Station - Articles (Ethical Investing - UN SDGs)Impact Investing was actually first defined as a concept back in the 1990s, but remains smaller in terms of total investment funding, and is often confused with Philanthropy.  The primary goal is to intentionally invest in companies or projects that tackle social or environmental problems, such as Climate Change or poverty or education in remote areas.  Unlike Philanthropy, Impact Investing still expects a financial reward for the effort, but must also contribute a measurable socially-beneficial outcome.  The UN Sustainable Development Goals are often used as a guide for these investment strategies.

ESG was first coined in a 2005 report for the ‘Who Cares WinsConference hosted by the UN Global Compact, bringing together institutional investors, asset managers, research analysts, consultants and government regulators to build a foundation for long-term investment considerations that go beyond just growth in shareholder value and wealth.  ESG is more operationally focused on the actions of a company itself.  An investor analyses the ecological footprint of the business, along with transparency, corruption, diversity, human rights records, consumer protection and many more risks and opportunities.  There are even rating agencies, such as Sustainalytics and MSCI, that provide ESG Scorecards for investors to review.  Again, like Impact Investing, these are metrics that are used in addition to financial performance to judge the merits of any given investment decision.

Belay Station - Articles (Ethical Investing, ESG - JH Investment Mgmt)SRI, Impact Investing, and ESG are all likely to continue to see growth and support in the future.  The jury is still out on whether ethically-conscious investing provides better pure financial returns, however.  There is some evidence that during the recent stock market fall due to the Covid-19 pandemic, ESG Funds, for example, have performed above their peers.  The counter-argument is that many ESG funds are only temporarily benefiting from eliminating sectors related to oil and air travel due their carbon emissions footprint, and that once shelter-in-place orders are lifted, financial returns in these sectors will rebound.

Either way, ethical investment choices are likely to dominate discussion in upcoming months and years.  Survey after survey continue to show the majority of people are interested in sustainable investing.  A 2019 report by Morgan Stanley suggests this number is as high as 85% on average, and 95% amongst Millennials.  Other surveys vary in specific numbers, but the ultimate conclusion is that ethical and sustainable investing is no longer a fringe preference, but a societal choice aimed at improving the lives of people and protecting natural resources.

Don Jurries

Featured Graphs and Charts:  WallStreetMojo, CNote, John Hancock Investment Management and the UN Division for Sustainable Development Goals

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