Sunday, June 15, 2008

Does Ethical Investing Work? (Part II)

Quote of the week:
'Besides being a leader in genetic engineering, Monsanto is one of the largest suppliers of seeds in the world. It also sells the widely used herbicide Roundup, use of which has grown with the adoption of genetically engineered crops resistant to Roundup.' - The NY Times lets slip how the Agri-Food business really works.

The Ittihad Weekly Briefing is now archived at:

Commentary of the week:

Does Ethical Investing Work? (Part II - contd. from the last issue):

As promised, this week sees us beginning to tackle the idea of Ethical or Socially Responsible Investing (SRI), which are actually slightly different from each other but which I will knowingly treat as two peas in a pod for the purpose of most of our discussion. The actual difference is that SRI is typically a negative screen which roots out bad apples in the corporate sector, whereas Ethical Investing is a search for the 'good apples' in the stock market in which we can invest. For the purposes of our discussion today, think of them as identical twins - they might be different in theory, but to us they look the same (this is called the problem of reductionism in logic - a severe logical fallacy for lesser mortals).

As we discussed last week, one of severest problems we face as people who believe that we are responsible and accountable for our wealth (or debts), not just our actions - is the inability to control what uses our funds are put to if we plug into the conventional financial system in any meaningful way. Given that we 'need' to have mortgages, savings, credit cards etc. simply in order to live 'normally', how are we to ensure that the hard-earned money we earn and save for our kids is not actually going towards poisoning the very Earth and the water that will be left for our Grand-kids? In a system that functions according to its own value-less logic, how do we live and function with the values that we do have without feeling like hypocrites who talk a lot but whose money is still part of the problem. After all, nobody really believes that we should spread poisons like cyanide in their own backyard, so then why is okay if it is done 2000 km away (and we ignore it) if the rivers will simply carry it to your neighbourhood (if not your cousin's) in a matter of weeks? How much is clean water really worth? The economists of the world have a really good answer to this question - so good that it is not even worth discussing.

Our answer has to be different. We must of course, begin to impose some limits (did someone say values) on how capital is taken from our savings, put into companies that do damage, and then given back to us in a sanitized manner without us really knowing what it has been up to in the meantime. This is the moral disintermediation problem we discussed two weeks ago and even though I was away for more than a whole week, I return to see it still has not been solved (come on people ...).

One possible proposed solution has been the movement towards Socially Responsible (SRI) or Ethical Investing. This is the movement where individuals and investment companies screen and focus their investment activities by first screening out 'bad' corporate citizens from their portfolios and then investing instead in companies that are either improving their image or practices, as the case may be. This is supposed to have two effects (at least). One, it signals to companies and governments (perhaps) that they need to have policies and governance mechanisms in place that will protect egregious abuses and that someone is always watching. Two, it is supposed to deny capital to the 'bad' companies and deny much needed liquidity to their shares in the stock markets so that the stock collapses and the company is sold to someone with a better handle on both business and morals.

This sectors has now grown to over $500B in Canada (which is big) and there seems to be a groundswell of interest in the subject. People from all backgrounds are now asking their financial advisor questions about whether there is anything available which makes them money and is also not damaging to the environment. God only knows how this question is being handled in your household my advisor is very shifty with his answers. One suspects that he knows less about this sector that he lets on, but I digress (and embellish). The question for us is whether SRI does what it intends to do? Does SRI solve the problem of disintermediation? Does it signal the right thing to companies? Does it deny capital to corporate offenders?

The answers to these questions are, from my humble perspective - Yes and no, no, yes & then finally - no. Clear as mud? Let me explain. SRI as a sector is only partly successful (to date) given its intentions. It does not solve the problem of moral disintermediation because we still do not know what our money is up to and where it actually goes (transparency is still an issue). It does signal extremely well to companies that investors are waking up, but ultimately it does not really deny capital to companies with faulty records and dubious future plans. This is because the top holdings for many SRI funds and portfolios in Canada are the banks. This would not ordinarily be a problem except for the fact that in Canada, the banks are actually the largest producers and channels of capital (no, not the government). Even though some investment capital is moving away from companies directly, the same investment capital finds its way to companies through the banks in the form of debt instead. The SRI fund invests in a new offering of bank shares, the bank turns around and loans this money to Company G. Cyanide still finds its way into the water supply. The difference though, is that Company G has a more difficult time (sometimes) selling its shares. Is this success?

Of course, it is too early to say and I think that we should all as people still investigate it for ourselves, but in my opinion, and I fully recognize that I am both a bit weird and in the minority, but we need something a little more drastic. At the very least, the SRI sector needs to begin to demand that the banks begin to include SRI considerations in their loan criteria. That will send shockwaves through the corporate board-rooms where the environment is considered little more than a garbage dump because they know they can always get a bigger loan. It will also begin to address the seriousness of the situation in a way that will change practices quickly, rather than at the leisurely pace that things are usually done in Canada. Of course, as believers, we do not think that the banks' business models are good for society at all, but that is no reason to think that they could not have better practices than they do at the moment. I leave it up to you to decode where IF fits into all this, but from my perspective, we really have to stop thinking about just money when we talk about money. As thinking, feeling people, we are called to a deeper existence.

Upcoming Events:

We have been invited by TARIC mosque (located here) to present our views on Islamic Finance on Saturday, the 21st of June at 7:00 pm. I encourage everyone to attend with friends as the discussion will focus on the place that Islam does or does not have in our financial choices. By the end of the discussion, attendees should have a good idea about how to judge the IF field for themselves. This is a discussion that will IA take place outside the logic of a sales presentation so you can leave your cheque-books at home, we will accept Halal Credit Cards instead (Relax, I'm kidding). Come with friends and come with difficult questions - hopefully, we will trade in good ideas that will profit our minds.

Finance News:

1. Wonderful Q/A session with a serial entrepreneur (hat-tip to K Niazi) ... read more here

2. Remember how Dr. Yunus from Bangladesh got the Nobel Prize for Micro-finance a few years ago? Well, this article looks at some recent happenings in the world of Micro-finance. I believe the word used was 'shocking' ... read more here

Economic News:

1. The Economist's analysis of the prospects for the Oil markets ... read more here

2. House prices fall faster than in the depression ... read more here

3. Some insights about what drives Innovation in an economy ... read more here

4. The companies whose tinkering with our food supply contributed to the food crisis in the first place now say they have a solution ... this news is most disturbing ... read more here

Islamic / Middle East / Emerging Markets:

1. In case you were still wondering where Oil Money usually goes ... read more here

2. The definitive and final reason on why Japan is the absolute and most advanced civilization on Earth (ever) ... read more here

Interesting but not all Finance:

1. In case you're wondering where to go for the summer ... read more here

2. A new way to clean up oil spills? ... read more here

3. A new site to help you analyze your business ... read more here

4. A wonderful play about a girl from the US who died under tragic circumstances in Palestine recently. A must see for those interested in how wars affect people's livelihoods and why Ethical Investing has an aversion to investing in defence related industries ... read more here

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