The importance of sleeping well at night

OPINION: Last week there was an interesting opinion piece on Stuff by Richard Meadows.

Entitled, “The case against ‘ethical’ investing,” the article pointed out some of the very real difficulties with socially responsible investment.

Fair enough, I thought – there certainly are difficulties and there is every benefit to point them out.

However, I turned grumpy when Meadows said that ethical investing won’t make a jot of difference and may do more harm than good.

No doubt Meadows was looking for a bite – and he’s got one!

Meadows claimed that if you understand how the share market works, you will know that when you buy shares in Evil Corp you are giving your money to another investor rather than to Evil Corp.

Effectively, you can happily buy shares in Evil Corp because Evil Corp does not see a cent of your money.

That’s true – but disingenuous. If you followed Meadows’ logic, you would happily buy any company no matter how they made money: the use of child labour, manufacture of nuclear weapons, the sale of tobacco, harvesting whale meat, and so on.

Extend the logic further and roll the clock back 80 years and you would knowingly have bought shares on market in the German company Degussa. Degussa manufactured Zyklon B, the gas that was the preferred killing tool of the Nazis at Auschwitz.

I wonder how we would explain that to the grandchildren.

“Sin companies” may not see any of your money when you buy shares but they do benefit.

When you buy shares, you are helping to push the share price higher. In doing so, you are rewarding not just the investor whose shares you have bought, but also the existing shareholders.

The reward of a growing share price encourages other prospective shareholders to come in and buy.That higher share price means it is easier and cheaper for Evil Corp to raise more capital.

You may also be benefiting Evil Corp’s management because for some companies, salary is tied to share price through share options and other incentives.

We cannot forget bonds in this discussion – any half-way decent socially responsible investment policy would mean that you shun both bonds and shares.

If you buy the bonds of Evil Corp, you are helping push up the bond price and lower the interest rate for the next time that Evil Corp goes to borrow money.

Refusing to invest can help choke off objectionable companies. Yes, as Meadows says, you should also refuse to buy these companies products, but anything that assists a company’s share price helps the company access cheaper capital.

You may have to forgo higher returns. Nevertheless, I think most of us lie in our beds easier if we snub investment in businesses that make the world a poorer place.

Martin Hawes is the Chair of the Summer KiwiSaver Investment Committee. He is an Authorised Financial Adviser and a disclosure statement is available on request and free of charge, or can be found at www.martinhawes.com.

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