Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 195

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:

  1. The degree of harm caused
  2. The denial of humanity
  3. The principle of double effect.

[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 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.

 

Adam Tindall is Chief Executive Officer at AMP Capital, a sponsor of Cuffelinks.

9 Comments
Steve
December 28, 2018

If we have to go to war against an enemy nation, I hope there are plenty of munitions companies that are highly profitable.

Stan Mc Donald
December 28, 2018

The approach to responsible investing by AMP looks to be well thought out and should be encouraged.Industries such as gambling and tobacco, with no benefit to society, are the easy targets, but in focusing on specific types of armaments (land mines,cluster bombs, biological and chemical weapons) they are demonstrating very clear thinking. For those who want to avoid investing in any weapons manufacturer,the question they should consider is "do you want our armed services armed or not ?"If yes,then where do those weapons come from that we as taxpayers pay for ?

Geoffrey Denman
March 23, 2017

Adam, its great to know the professionals, or some of them, are ethical investors.I manage our family SMSF and have self-imposed ethical restraints; no fossil fuels, gambling, enviro-damaging stocks - in short, we try to invest in stocks that IMPROVE humanity. We rejected opportunities for gold stocks recently, because they interfere negatively with the environment, but we would buy LNG gas stocks (not oil or coal) as it reduces harmful effects of climate-change. This feels good for us - we put our money were are heart are. We do OK by the way, about 10% pa. Geoff

Ian Woods (AMP Capital)
March 27, 2017

Geoff, thanks for your comment. It’s great to hear your experience with ethical investing and it sounds like you have a similar ethical investment approach as our Responsible Investment Leaders Fund. We also firmly believe that we can meet our fiduciary obligations to investors and our ethical obligations to be a responsible fund manager, still delivering strong investment returns.

Chris
March 23, 2017

I can understand weapons being excluded (landmines being non-discriminating against who or what they hurt or kill), but if someone wants to profit from the stupidity (or "choice") of others to smoke, drink and / or gamble, why not let them go for it ?

Warren Bird
March 23, 2017

I'd be interested in hearing AMP's answer, but the basic element of the case for tobacco divestment is that it is a highly addictive and harmful product that society accepts should be packaged with all sorts of warnings about the extreme health risks and where just about all forms of passive smoking have now been legislated against (eg it's banned in restaurants).

The argument that people freely choose to smoke may apply to some who take it up, but as Dr Bronwyn King says:

"The reality is that young people, those from a low socio-economic background, and indigenous people make up much of the smoking population. A combination of lack of education, cycles of poverty, and targeted marketing means that many are not making, nor empowered to make, informed decisions."

(Dr King is a radiation oncologist who deals face to face with the awful consequences of smoking and fights against the practice. She was aghast to find that her own industry super fund invested in and profited from the very thing that she could see was devastating people. She is a passionate divestment advocated.)

I would not have thought this was a controversial exclusion.

Ian Woods (AMP Capital)
March 27, 2017

Chris, thanks for your comment. We took the decision that we, as a company, had a responsibility to look at the things we invested in. That meant, in exceptional circumstances, that we would exclude some companies for purely ethical reasons. Tobacco manufacturers were excluded because of the highly addictive nature of tobacco products to individuals who smoke, the fact there is no safe level of consumption and increasing evidence of negative health impacts of second-hand smoking (so impacting people who hadn’t made the decision to smoke).

Warren Bird
March 23, 2017

Well done, Adam and the team at AMP for this decision.

I've found from conversations around the industry that more investors, retail and institutional, are keen to have activities like these - especially the munitions manufacture - excluded from their superannuation, etc. I'll be very interested to see if you lose any investors because of this decision and I hope that AMP plans on doing 'exit interviews' with their clients over the next few months to test the situation.

I'm sure the results will do two things: 1) demonstrate to those financial advisers who still simplistically assume that no one wants 'ethical funds management' that this just isn't true, especially when the nature of the ethical issue is explained as clearly as you have here and 2) it will encourage other fund managers to follow suit.

Of course, for some (such as the Uniting Church for whom I work), the list still isn't long enough, though I presume that AMP will continue to offer the Responsible Leaders suite of funds for investors who have additional ethical and environmental exclusions.

Ian Woods (AMP Capital)
March 27, 2017

Warren, thanks for your support for the initiative. As you can imagine, we have engaged widely with our institutional and retail clients and the majority we spoke to said they expected these exclusions from a responsible fund manager. The reaction following the announcement has also been similarly positive.

We agree with you that increasingly people do not want to be invested in harmful products. We’ll still offer the Responsible Investment Leaders range of funds for those clients who want to exclude a broader range of sectors from their investments in line with their values.

 

Leave a Comment:

     

RELATED ARTICLES

Four reasons ESG investing continues to grow

Top 10 ESG issues for 2019

The impact of the trend to ethical investing

banner

Most viewed in recent weeks

Super changes, the Budget and 2021 versus 2022

Josh Frydenberg's third budget contained changes to superannuation and other rules but their effective date is expected to be 1 July 2022. Take care not to confuse them with changes due on 1 July 2021.

Noel's share winners and loser plus budget reality check

Among the share success stories is a poor personal experience as Telstra's service needs improving. Plus why the new budget announcements on downsizing and buying a home don't deserve the super hype.

Grantham interview on the coming day of reckoning

Jeremy Grantham has seen it all before, with bubbles every 15 years or so. The higher you go, the longer and greater the fall. You can have a high-priced asset or a high-yielding asset, but not both at the same time.

Whoyagonnacall? 10 unspoken risks buying off-the-plan

All new apartment buildings have defects, and inexperienced owners assume someone else will fix them. But developers and builders will not volunteer to spend time and money unless someone fights them. Part 1

Buffett says stock picking is too hard for most investors

Warren Buffett explained why he believes most investors should not pick stocks but simply own an S&P 500 index fund. "There's a lot more to picking stocks than figuring out what’s going to be a wonderful industry."

Should investors brace for uncomfortably high inflation?

The global recession came quickly and deeply but it has given way to a strong rebound. What are the lessons for investors, how should a portfolio change and what role will inflation play?

Latest Updates

Exchange traded products

ETFs are the Marvel of listed galaxies, even with star WAR

Until 2018, LICs and LITs dominated ETFs, much like the Star Wars franchise was the most lucrative in the world until Marvel came along. Now ETFs are double their rivals, just as Marvel conquered Star Wars.

Shares

Four leading tech stocks now look cheap

There are few opportunities to buy tech heavyweights at attractive prices. In Morningstar’s view, four global leaders are trading at decent discounts to their fair values, indicating potential for upside.

Shares

Why copper prices are at all-time highs

Known as Dr Copper for the uncanny way its price anticipates future economic activity, copper has hit all-time highs. What are the forces at play and strategies to benefit from the electric metal’s strength?

Economy

Baby bust: will infertility shape Australia's future?

In 1961, Australian women had 3.5 children on average but by 2018, this figure stood at just 1.7. Falling fertility creates a shift in demographics and the ratio of retirees to working-age people.

SMSF strategies

The Ultimate SMSF EOFY Checklist 2021

The end of FY2021 means rules and regulations to check for members of public super funds and SMSFs. Take advantage of opportunities but also avoid a knock on the door. Here are 25 items to check.

Economy

How long will the bad inflation news last?

The answer to whether the US inflation increase will prove temporary or permanent depends on the rates of growth of the quantity of money. It needs to be brought down to about 0.3% a month, and that's a problem.

Economy

The ‘cosmic’ forces leading the US to Modern Monetary Theory

If the world’s largest economy adopted a true MMT framework, the investment implications would be enormous. Economic growth would be materially greater but inflation and interest rates would also be much higher.

Sponsors

Alliances

© 2021 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.