Could Trump be right about... ethical investing???

Damien Klassen

Nucleus Wealth

Many of you will have seen Trump's announcement essentially trying to prevent pension funds from considering ethical issues for investing. To quote The Australian:

After a remarkable run of success in the investment sector, ethical investing has received an unwelcome jolt from the US government with a Trump administration proposal to remove so-called Environmental, Social and Governance (ESG) investments from retirement funds.

With the policy-making US Department of Labor controlling funds representing one-third of the entire US sharemarket - the announcement has sent shockwaves through the global ESG sector.

With funds of $US9 trillion ($13 trillion) under its control, the US Department of Labor says that fund managers acting on behalf of American workers should only follow "objective risk criteria" when buying stocks and bonds.

In essence, the proposal puts forward a hardline traditional view of investment objectives where the sole purpose of retirement funds is to make money for members.

Declaration of interest

Now, I'm not unbiased in this debate. We run tailored ethical funds, where investors choose from 30+ types of companies to exclude from their portfolios. About 2/3rds of our clients have selected at least one ethical option.

As strange as it may sound, I'm lining up with Trump on this one. Well, maybe not "with" with him, I do think his proposal is motivated by trying to help his coal and oil mates. And is probably partly designed just to prompt outraged headlines in left-wing media. And it puts unnecessary regulatory measures on genuine ESG funds. But there is an element of truth to Trump's concern.

And let me be clear, I'm not saying that there should be no ESG funds. If investors choose to invest in an ethical fund, then that is fine. But an ordinary investor who chooses an ordinary superannuation or retirement fund shouldn't find out that those funds have started making non-financial ethical decisions on behalf of investors.

Trump is wrong about the G in ESG investing.

Trump's actions as president clearly suggest he doesn't think governance is an issue. I disagree. Investors should absolutely consider corporate governance issues before investing. There are clear performance benefits.

The E & S are different.

It is my job as an investment manager to make profitable investments for my investors. These decisions should absolutely take into account the long term prospects and possible negative impacts of Ethical and Social considerations for particular sectors.

Suppose I think killing your customers (tobacco) or your planet (fossil fuels) will limit a company's investment prospects. In that case, I should put that into my investment assessment.

However, I don't believe it is my role as a fund manager to arbitrate the ethics of legal products. Some people think tobacco is horribly addictive and unethical, but gambling is each person's own choice. Others have exactly the opposite view.

For most ethical funds, you can either have both sectors or neither, regardless of your view. My goal is to give every investor the broadest possible opportunity set. So we run every investor and superannuation client through a separately managed account where they can make these choices for themselves from over 30 different options. For example here are our climate change ones:

Investors: don't stop there

I want investors to tick a box and exclude investments from their own portfolio if they feel strongly about an issue. It is a positive step. But it is only a very small step. There are much better ways to help.

Say you are concerned about climate change:

a. Make a donation. See here or here for some options.

b. Lobby regulators or legislators. Donate your time to lobby boards and legislators. Here is a list of countries with dates to phase out fossil fuels:

Getting your country on that list, or reducing the time to phase out will have far more effect than convincing a fund manager.

c. Boycott the product Companies care more about people not buying their products than they do about you not buying their shares. It makes no sense to refuse to buy an oil company's shares if you use their fuel every day.

Don't get me wrong, I want you to avoid buying shares in companies where you don't agree with the ethics.

But if you truly want to make an impact, don't stop there.  

The information on this blog contains general information and does not take into account your personal objectives, financial situation or needs. Past performance is not an indication of future performance. Damien Klassen is an authorised representative of Nucleus Wealth Management, a Corporate Authorised Representative of Nucleus Advice Pty Ltd - AFSL 515796.

Damien Klassen
Head of Investment
Nucleus Wealth

Damien runs asset allocation and global stock portfolios for Nucleus Super, Nucleus Ethical and Nucleus Wealth. His 25 year+ career includes Global Quant at Schroders, Strategy at Wilson HTM & co-founder of Aegis.

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