Responsibility and reason

The past decade has seen “socially responsible investing” grow from a fringe habit followed mainly by cartoon lefties, to a practice followed by a significant minority of investors. Like it or lump it, companies competing for investment capital will have to deal with it.

Socially responsible investing, like sustainable development, often seems to mean, as Humpty-Dumpty’s words do in Through the Looking Glass, just what the speaker chooses it to mean. But the practice does divide roughly into two parts: investment screening and shareholder activism.

Of these, investment screening is by far the more bone-headed; it consists principally in raising a mutual fund to invest only in those companies whose products or services fit with the moral imperatives of the investor (or, in practical terms, the fund manager). Typically there are certain industries — tobacco, armaments, and the nuclear industry lead the blacklist — in which the fund will not invest. The more subtle funds will often modify their decision rules to fit in “good” companies from otherwise “bad” industries; the cruder ones simply keep a little list.

Though many “ethical” funds use quite definite criteria to choose stocks, they do not seem to have developed their ethical standards with anything like the same intellectual rigor. On the contrary, their choices not to invest in companies that produce military hardware, nuclear power or fuel, or tobacco, seem simply to have been drawn from the fashionable moralizing of the baby-boom generation. Nukes, guns, cigarettes bad; ethical investing good.

As if to burlesque itself, the large Canadian group Ethical Funds even lifts a company over the moral bar if less than 10% of its revenue comes from tobacco or related projects, or if less than 5% comes from weapons production and maintenance. The nuclear industry, on the other hand, is thoroughly bad.

Similarly, the environmentally conscious consumer of the 1990s is the environmentally conscious investor of today, and comes to the market with much the same set of prejudices he has had for the past three decades. Among them, usually, is a conviction that digging stuff out of the ground is irresponsible and vaguely immoral.

So it isn’t hard to find funds that refuse to invest in mining at all for what they take to be “ethical” reasons. The tempting conclusion is that buyers and managers of these funds are unreachable and irreclaimable, and anyone trying to make a living in morally unfashionable industries should simply assume he won’t have access to that capital.

Shareholder activism, on the other hand, embodies the principles all companies say they believe in: that individual shareholders have not just the right but the duty to make corporate policy conform to their goals, whether those goals are financial or social in nature.

It is much more likely that mining companies will have to deal with this side of socially responsible investing. But this is no bad thing, because shareholder pressure — sometimes gently termed “engagement” — can be a strong incentive for companies to act responsibly, whether in their basic business dealings, their environmental stewardship, or their obligations to the communities they work in.

The need is for both sides to get it right, rather than to bring preconceptions and stereotypes to the argument. Many “green” activists would be embarrassed and astonished to see how seriously operating staff take environmental compliance; many social activists would be incredulous at companies’ genuine desire to build better lives for their employees and neighbours. And (need it be said?) people in this industry might be pleasantly surprised at how reasonable the “other side” can be once the facts are out.

The socially responsible investor can prove himself genuinely responsible by opening his eyes and ears, as well as his mouth. The socially responsible company can earn its spurs by listening and acting on the issues shareholders raise. After all, with the power that they can potentially exert en bloc, they will be boss not just in theory but in practice as well.