Critics are fond of asking this question about what they regard as the Achilles' heel of socially responsible investing: can the moral suasion of investors alone improve the behavior of companies on ESG issues?
Regulation Needed, Too
Our answer is, no, we don't think investors single-handedly have that power. Socially responsible investing has in fact led to productive partnerships between companies and investment managers that have brought about progress on ESG issues. But we think at the very least one other catalyst-the potential and actual influence of government regulation-is also critical to achieving that progress.
At any rate, in managing stock portfolios over the years, we've observed with hawk-like keenness this phenomenon: the savviest companies-the companies that are prime candidates for investment-are the ones who tend to understand it's in their best interest to embrace responsible ESG practices, if for no other reason that it helps preempt even more onerous regulation. In general, the self-regulation that's required of companies seeking to be socially responsible is less financially burdensome than government regulation ultimately proves to be. It's been our experience that the best companies realize that doing the socially responsible thing is the smart thing because in most cases it's cost-effective in the long term.
And although we and more than 700 other like-minded investors certainly can't change the world by ourselves, that doesn't mean we shouldn't try. And when we succeed, in however small a way, we derive satisfaction from knowing that we're helping to make the world a more fair, healthy, safer, and humane place. If that sounds sappy to some, so be it.
Specifically, we have chosen to follow the UN's Principles for Responsible Investment for three reasons.
The Right Thing To Do
One, we believe socially responsible investing is the right thing to do.
As we see it, it's highly compatible with our long-held corporate values articulated in Our Mission statement, written by Chairman and Chief Investment Officer Bob Turner when our firm was founded in 1990. In that statement, we commit ourselves "to activism to see the community and society in which we live prosper." We believe socially responsible investing is a legitimate way for us to contribute to the general prosperity and well-being of the global community and society around us.
We concede that socially responsible investing isn't perfect-what is?-but we think it does present a rational alternative to simply washing your hands of any commitment to applying principles of fairness, ethics, human decency, and good corporate citizenship to investing. We believe that in the long run, it's better for both our clients' wealth and society to invest, for instance, in a profitable company that treats its workers humanely and fairly rather than in a profitable company that treats its employees like expendable machine parts.
We think the key word in socially responsible investing is responsible: socially responsible investing calls for a higher standard of behavior by both investors and the companies they invest in. Author Michael Lewis has characterized the hypocritical mindset of some investors toward their investments in this way: "Just give me back as much money as possible. Gouge consumers, cheat employees, poison the environment, lie to the public markets-just do it all sufficiently artfully that it doesn't dent my portfolio." But when companies behave in such a manner and are caught, he says, investors "collapse to the floor in disbelief and bay for their money back. It is at that moment-and not a minute before-that they discover the novel idea that businessmen in possession of other people's capital should be held to the highest ethical standards" (emphasis ours). Indeed, as we see it, companies that fail to maintain reasonably high ethical standards sooner or later generally turn out to be lousy investments.
Compromise In A Gray World
At the same time, we think in trying to do the right thing in socially responsible investing, some compromise is necessary. One reason why socially responsible investing has acquired a bad name in some quarters is that it in some instances applied overly simplistic, black-and-white standards to a complex, gray world.
In truth, the quandary in socially responsible investing is to determine how to best draw distinctions between socially responsible behavior and socially irresponsible behavior. In the real world, it's exceedingly difficult to find companies to invest in that are completely and utterly pristine-corporate Snow Whites in a milieu that can seem upon close scrutiny to be overly populated by harlots. But we think some useful distinctions can be made between those companies that generally seek to minimize their environmental impact, for example, and those companies that generally don't.