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Christopher McCall: Ethical investment and the law - time for a reappraisal?

16 Oct 2018 Voices

Are interpretations of the law around ethical investment still fit for purpose, asks Christopher McCall.

The recent vote at the General Synod of the Church of England to instruct its investing bodies to disinvest from oil and gas companies by 2023, unless they can show that they are on track to tackle climate change, brings into focus the scope for charity trustees to pursue ethical investment policies.

Charity trustees are not in any sense free from the duty of all trustees to do the best they can in securing proper financial returns for their trusts. But one question of increasing importance lies in the possibility that changing perceptions of what is an ethical business model may lead to a situation in which the market simply does not “like” the investment concerned, to the point where value may quickly disappear and trustee investors are at risk of making serious losses. 

One of the curiosities of the technology age is that it makes it easier to provoke debate about subjects of public interest, and in the process makes it easier to debate the rights and wrongs of aspects of those very businesses which it has spawned. So ethics rise up the scale of perceptions which the investor has to take into account, simply because people can vote with their feet.

Equally, climate change may be seen to be such a threat as to lead to a search for alternatives to what have hitherto been thought to be necessary components of modern life. When the search for those alternatives eventually succeeds, there will of course be winners and losers. But the losers will be those who have not taken account of the reasons why society has forced the pace and have not thought ahead in terms of recognizing that ethics are no more and no less than the underpinnings of a healthy society. What automotive business is not pursuing the quest for alternative sources of energy? Trustee investors should beware of investing in the laggards.

Suppose for example that research can show that the recently recognized links between pollution levels and levels of dementia are not mere arithmetic curiosities but betray a true case of cause and effect; is it not inevitable that competitors will seek to move the market into cleaner alternatives and thus drain value from what will then have emerged as unethical investments?

Ethics as a hedge against risk

The purpose of these comments is simply to suggest that wise trustees may see the pursuit of ethical trends in investment as a positive mechanism for protection against loss rather than a choice of perceived virtue as against financial reward. The latter was what the judges in the two modern cases on ethical investment ruled out. They did not rule out advantageous ethical considerations.

In the Scargill v National Union of Mineworkers Pension Fund case in 1985, Sir Robert Megarry unsurprisingly rejected the idea that investment policies could be dictated by personal preference. And in the Bishop of Oxford’s case in 1991, Sir Donald (later Lord) Nicholls did not object to ethical investment in itself; he did not criticize a pre-existing policy which excluded something of the order of one sixth of the market; he simply rejected the case that ethical considerations could be preferred to the fiduciary’s duty to protect against financial harm. He said the further ethical restrictions proposed went too far to allow proper scope to diversify. In other words, the judge sought to pre-empt the possibility that ethical views might expose the fund to an unacceptable degree of risk.

If then the justification lies in an actual aim to protect against loss, ethics and duties may well seem to point the fiduciary investor in the same direction. How many trustee investors in Wonga would not now look back and say that loss was probable once criticism of the business model began to prevail? And was that criticism, from an investment perspective at least, not a mix of ethical thinking and financial common sense?

To take another example, the Facebooks and Amazons of the modern world have come in for criticism of tax policies which, though legal, might be thought unhealthy or unfair from the point of view of society as a whole. If so, is there a possibility that the market will simply say the stock is less valuable than it appears because sooner or later the balance of taxation will change, failing which public enthusiasm for the business models and as a result their value will evaporate?

Climate change and public benefit

There is thus an arguable case that ethical investment policies may be no more than a financially justifiable weapon in the protection of a charity’s funds. What though of the other concern that trustees may feel; do the objects of the charity call for various classes of investment to be ruled out? 

The present law is that that may be the case but only in exceptional circumstances. Considerations of climate change may raise issues whether this view can still be maintained. Many charities are more or less concerned with the relief of need in countries increasingly subject to risks of flooding or drought. The number of deniers that these are risks exacerbated by certain business models has lessened dramatically. Should trustees of such charities not be thinking what they can do in terms of their investments to reduce the very needs the profits of their investments are used to pre-empt? 

Can charities aimed at the fight against disease not be allowed to recognize the fact that pollutants may be a cause of ill health so that investment in polluting industries may be undoing the work they seek to pursue? It may well require further exploration of these issues before the courts before the case for ethical investment policies can be seen to extend to every trust which exists to pursue the public benefit. 

But are the so-called modern cases still a proper guide for charity trustees in a world where science has advanced as rapidly as the rejection of selfish tax policies? Are they really still now “fit for purpose”? Many a charity trustee may well think that the time has been reached when there is a crying need for a change in investment policies. Ethics are the foundation of that healthy society which charity seeks to secure.

Perhaps the question should be turned around: can charity trustees be expected to acquiesce in what may be unhealthy pursuit of profit, either because it carries the seeds of economic loss or because it risks causing harm which conflicts with the public benefit?

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