Should we exclude companies purely on ethical grounds?
Fund managers used to be discouraged, or even prohibited, from taking ethical issues into account when making investment decisions on behalf of their clients.
It was widely agreed that investment managers should not let consideration of ethical criteria distract them from choosing investments that maximise financial returns for their clients unless, of course, the client had specifically mandated ethical investment. Asset owners, so people said, were best placed to take action on ethical grounds.
But times have changed and society has changed with them. Fund managers have also had to keep up because we increasingly felt we didn’t want to deliver investment returns to customers irrespective of the cost to society.
How do trustees, managers and investors discharge their duties?
At the heart of this issue lies questions about how investors best discharge their duties. What actions are acceptable in the pursuit of returns? Can investors, or indeed should they, dismiss ‘immoral’ activities relying instead on governments to intervene via regulation? Is it sufficient for investors to say they tried to engage with a company to improve the nature of a product offering or on their corporate risk management strategy?
As recent campaigns on a range of issues have demonstrated, investors are increasingly being asked to justify their actions. This has raised questions about the role of ethics in investing and whether it is defensible for investors to support an activity that, while commercially convenient, viable and legal, is inherently wrong (i.e. something that is bound to have an adverse impact on stakeholders).
Ethical dilemmas by their very nature are not straight forward. The question of ‘whose ethics’ is sometimes used as a reason not to articulate and implement an ethical position. Certainly, criticism by others of a particular ethical position may make it tempting to choose the path of least resistance and avoid any explicit consideration of ethics.
Integrating environmental, social and governance (ESG) issues into our investment decisions and in the discussions we have with the entities in which we invest is entirely consistent with the objective of delivering appropriate risk-adjusted returns over the long term. This approach was formalised when AMP Capital became a signatory to the UN Principles for Responsible Investment (UNPRI) in 2007 and further reinforced in 2012 with the public statement of our ESG and Responsible Investment Philosophy.
Deciding to exclude certain companies
In 2012, we did not seek to exclude specific companies, asset types or industry sectors from our investable universe on wholly moral or ethical grounds, but this position was recently revisited. We concluded that we had a responsibility, as an investment manager, for what we choose to do, or not do, and how we invest. And that, under rare or extreme circumstances, it may be appropriate to exclude investments in a particular company or sector for purely ethical reasons. The decision was also reflective of the changing attitudes of our clients, who increasingly do not want to be invested in harmful products.
Subsequently, we added an ethical framework and decision-making process that, under exceptional circumstances, would lead to the exclusion of certain investments from a portfolio based on ethical grounds. Working with ethicist Dr Simon Longstaff of The Ethics Centre, we developed a principles-based framework that provided a consistent basis for considering a range of potential ethical issues, not only now but well into the future.
The three concepts that underpin the ethical framework are:
[Editor’s note: the principle or rule of double effect concerns the ability to act when a legitimate aim (in this case, removing a company based on ESG guidelines) may cause an effect one would normally be obliged to avoid (eg, reducing the size of the investible universe)].
- The degree of harm caused
- The denial of humanity
- The principle of double effect.
The result is that we will no longer invest in manufacturers of tobacco and companies involved in manufacture of cluster munitions, land mines, and chemical and biological weapons. We have now started the process to divest of these companies from across our entire portfolio. The divestment of tobacco manufacturers will be the largest to date in Australia.
It’s important to note we are only excluding certain companies or sectors by exception. We still firmly believe in company engagement in order to effect meaningful change. In the case of tobacco, cluster munitions, landmines, biological and chemical weapons manufacturers, however, no engagement can override the inherent dangers involved with their products.
Crucially for investors, this decision still means we can meet our fiduciary obligations to them and our obligations to be a responsible fund manager, delivering strong investment returns that continue to meet their objectives. Our analysis has found that our funds can continue to be managed effectively under this new framework without compromising investment objectives.
In looking after our clients’ funds, we consider it prudent that we articulate the principles by which we discharge this responsibility. Introducing a new ethical framework is the right thing to do by our investors and it is consistent with our long-term focus on responsible investing, which provides greater insights into the potential risks and opportunities that may impact the value, performance and reputation of companies we invest in.
About the author
Adam Tindall is Chief Executive Officer at AMP Capital.
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