Ethical Investing One Answer to Corporate Accountability

This post comes from JustMeans member Christopher Cairns.

When looking at unethical investing it’s often difficult to trace responsibility down the chain. A recent Wall Street Journal piece by David Weidner, though, does just this and places at least part of the blame for funding genocide in Sudan on two institutional investors: Fidelity, and Vanguard. These two companies invest in Chinese state oil company PetroChina, which in turn pays royalties to a Sudanese government that has funded atrocities in Darfur.

In his call on Fidelity and Vanguard to do the right thing, Weidner rejects Vanguard’s argument that the companies’ “strategy” allows no flexibility for ethical choice, even to drop “genocide" stocks. And so do I. But rather than employing shame tactics against these companies for indirectly funding atrocities, it’s better to look at what choice we have as individual employees, investors and consumers.

Divestment is one option. Unfortunately, this route in recent years has enjoyed limited success, though this is not to say that shareholder activist campaigns are fruitless. In 2000, Fidelity divested 60% of its holdings in Occidental Petroleum, whom human rights and indigenous activists accused of threatening the way of life of the indigenous U’wa people by intending to drill on their lands in Colombia.

Though at the time Fidelity claimed that protests outside its U.S. offices had no impact on its decision to divest, the fact that it did so at a time when Oxy’s share price was actually rising hints at the contrary. Still, human rights-related shareholder resolutions, despite occasional media attention, have rarely won more than 5% or 10% of the vote.

So if shareholder resolutions still enjoy only sporadic success at best, what else can we do to improve companies’ respect for human rights? Ethical investing is looking increasingly promising, and profitable; a 2007 study by Goldman Sachs found that “the market rewards sustainable competitive advantage.” The study indicated that companies scoring highest on Economic, Social and Governance factors (e.g. corporate responsibility) also had the best share price performance.*

This doesn’t imply, of course that companies’ strong environmental and social performance actually causes higher share prices. And it’s possible that large corporations’ size and strength equally enables both higher share prices, and better ESG performance since the wealthiest companies have more money to invest in ESG initiatives.

Still, companies, even corporate giants, that do well on both the social/environmental, and the financial bottom line and the investment funds that hold them will help to promote the norm that corporate responsibility and ethical investing are “good for business.” The hope is that as this norm spreads and ethical investors reap higher returns, companies will come to realize that incorporating environmental and social responsibility into their core business model is too compelling to ignore.

*Global Investment Research, Goldman Sachs. “GS SUSTAIN.” Investment analysis, 2007.