The hypocrisy of ethical investing

I was watching the news on TV on Sunday night, and I realised the hypocrisy of sustainable investing.  The sports section was sponsored by BP (a nasty fossil fuel company...

I was watching the news on TV on Sunday night, and I realised the hypocrisy of sustainable investing.  The sports section was sponsored by BP (a nasty fossil fuel company according to some), the lead story on the sports section was a story about the Sky City NZ Breakers (Sky City being a gaming / gambling company) and the political section included arguments between ACT, Labour and National parties about which would be the fastest to increase NZ Defense spending to 2% of GDP.  This was all happening on a government funded broadcaster.  That same Government has directed The NZ Superannuation Fund, the Accident Compensation Corporation, various Government investment entities and KiwiSaver default funds to avoid investing in companies and entities related to armaments, fossil fuels and gambling (among other things).

This is not only happening in the Government sector: on a monthly basis we see a new survey talking about how investors want to ensure their investments (and particularly their Kiwisaver funds) are ethical and the companies in which they are invested are standing up for the right types of decisions.  I think that the hope is that by avoiding investing in an industry we starve that industry of capital, pushing up the cost of capital and making it harder for them to operate.  This is where the hypocrisy of the situation kicks in.

The reason we are apparently happy to target investments in these spaces is because it is seen as a “costless decision”.  There is no immediate cost to us avoiding investing in these industries – i.e. we can still buy petrol at the gas station on our way home from work – and there could even be some long-term benefits, for example avoiding fossil fuel investments could be profitable should they become stranded assets over time.   Though the impact of these decisions is rather tenuous.

Yet at the same time we are very happy to take the advertising and sponsorship money that these industries provide us.  The truth is that removing the ability to provide sponsorship or advertising would likely have a much bigger impact on the business models of these companies, yet the collective “we” are unwilling to make the short-term sacrifice as it is a real and immediate cost.

The unfortunate reality is that over the past 12 – 24 months we have seen that these “do-good” investment decisions are not quite as “costless” as initially anticipated.  Bans on fossil fuel and weapons investment, for instance, have cost Governments’ and consumers around the world real money.

Let’s start with the investment ban on fossil fuels.  Investment in fossil fuel production has declined over the past 10 years in the US and Europe, and currently shows no sign of picking up.  Over the past couple of years, as fuel prices have spiked, Government’s around the world (including New Zealand’s) have decided to subsidise fuel prices to protect consumers from the elevated prices.  Immediately expensive.  Producers are unwilling to invest in additional drilling capacity because of uncertain long term regulatory prospects.  Many argue that a clean energy transition is important.  However, we cannot and will not achieve this transition by simply pulling the rug out from underneath the fossil fuel industry.   If such a transition is needed, then it needs to be an orderly and managed approach.

My other favourite is the ban on investing in weapons.  We are clearly and increasingly in a world of heightened geopolitical tensions.  Security is a big topic and defence budgets are growing all around the world.  The war in Ukraine is a great example of what happens when we stop investing in a key industry: there are worrying reports that the West is seeing drastically depleted munition reserves and cannot actually produce weapons fast enough to re-supply the Ukraine military at the moment.  Many countries are now rushing to figure out how the manufacturing base for weapons can quickly expand.

It’s arguable that a lack of investment in weapons manufacturers has pushed up the prices of the weapons needed, make it harder to support Ukraine which will most probably lengthen that conflict.   Again, a real cost.

Sustainable investing is an important topic and something that we are increasingly seeing can have a real effect on companies and people.   But rather than using sustainable investing as a political rallying call there ought to be a plan regarding the desired outcomes of this sustainable investing and what the real costs are.  We know we need a weapons and arms industry in the West and we can’t afford to move all production of weapons to developing countries: develop investment plans around the weapon needed.  For fossil fuels if a green transition is necessary, it needs to be handled carefully with an achievable transition plan and timeline that gives providers of capital and companies certainty around what can be achieved.  Not just catchy slogans…

Finally – gambling.  If the collective we don’t like it, then we should be looking to stop accepting sponsorship and pokie dollars (similar to the tobacco conversation), rather than simply withholding capital from the sector.

What do we want to achieve with sustainable investing?