Would you invest in slavery?

Blue & Green Tomorrow’s Sustainable Investment Bootcamp on Thursday raised some fascinating issues. One of the most pervasive myths of sustainable investment is that you must compromise on performance to align your investment portfolio with your values or beliefs.

The accepted wisdom in investment is that to maximise your return you have to invest in away that is unfettered by social or environmental considerations. This is nonsense.

Historically, sustainable and responsible investment (SRI) funds have been a tiny part of huge market and their performance has been heavily influenced by the performance of stocks that dominate the market, such as commodities and the extractive industries. If oil and gas companies are doing well, SRI funds suffer and vice versa. This view is increasingly outdated and wrong.

Today, the SRI market is large enough that there are star performers and sub-par performers, just as there are in the non-SRI sector. Poor performance afflicts non-SRI funds as much as SRI funds. It is easier for non-SRI investment houses to simply kill off low performers. To average the performance of a small sector and then to compare it to the larger sector is misleading. Nevertheless, in recent figures, SRI funds have outperformed their non-SRI peers.

More importantly, though, the way we measure performance is broken. If maximum return is the goal, investing in chemical weaponry, selling arms to oppressive regimes and offloading tobacco to developing countries with no public health, delivers excellent returns. Many would find this objectionable.

Will Day, who opened the event, pointed out that the narrow definition of what we measure to determine performance discounts entirely the social and environmental impact of conventional, non-SRI funds and the companies they invest in. This must change, not simply because it is ethical, but for our own self-interest.

Investing in funds that deliver short-term, marginally better returns, but that sabotage future income and growth, is self destructive. We have created a system that is threatening our way of life today and jeopardising the prospects for subsequent generations.

The past performance of a stock or fund doesn’t indicate its actual resilience in the face of future volatility, uncertainty, complexity and ambiguity. We are entering uncharted waters due to our unsustainable corporate activities. The period of steady, but unsustainable growth, has come to an end.

If you accept this future risk, SRI funds represent a rational and cautious precaution and diversification for investors. To not do so is to deny signals from the market, society and the environment, and to carry more risk than is necessary.

Will Day introduced the idea of optimised returns – the very essence of sustainability. Rather than maximising a marginally better return over the short-term, we should look to optimise our return so that, as Raj Thamotheram would put it, the long-term matters.

It is also true that the greatest investment returns come from the most innovative companies that disrupt the status quo. The most disruptive companies tend to be the most sustainable or have sustainability as their business model. One of the financial advisers during the second panel discussion pointed out that real gains in investment come from contrarian investment, and the contrarian funds are those that reject the current investment consensus.

Two hundred years ago, a group of wealthy contrarians became abolitionists. These Quakers, who had founded Cadbury’s and Barclays and become spectacularly rich from them both, found slavery to be abhorrent and fought a 50-year battle to end it, against the overwhelming consensus of the time. Slavery was seen as a way of maximising economic gain and endorsed by the bible. Today we find the trade appalling and unacceptable.

In 200 years, in 2213, what will the investors think of the people who defended the current investment consensus and have left them with a heavily polluted, thinly resourced, significantly warmer and less stable world?

We wouldn’t invest in slavery, whatever the profit.

Will you invest unsustainably?

Further reading:

The modern-day parable of the archbishop and the money lenders

Not over the long-term? Unsustainable investment’s ‘black swan’ moment

Ethical investment: better a diamond with a flaw, than a pebble without

There is such a thing as an unethical investment

The Guide to Sustainable Investment 2013