Evercore Pan Asset

In Cambridge last week I was asked about ethical investing by one of the Colleges.

My experience tells me there are as many different views of ethical investing as there are institutions wishing to do it. The two most common types come from people who want to make a statement against war and weaponry, who wish to keep their portfolios free of arms companies, and those who are concerned about health and wish to discourage cigarette smoking.

As an individual I have a lot of sympathy with both. I do not smoke, and think diplomacy and discussion is a better way of sorting out disputes than resorting to killing. If a client wishes to avoid certain investments then it is always possible to do that by one means or another.

However, on further analysis it turns out to be very difficult to do it effectively. Let us take the case of weaponry. Is the manufacturer of the weapons the main cause of the problem, or the many governments who wish to buy them? You could argue cogently that investing in UK or US government debt is unethical because they both spend such large sums on weapons, and sometimes use them to invade other countries. If they did not do it, the companies would not make the weapons to their order. Any individual weapons buyer and any individual weapons maker will usually argue that these items are for necessary defence.

If you take either case, where does the ethical investor stop? Is it just the tobacco company that makes the cigarettes? Should it include the banker than provides the capital to that company, the advertising agency that helps them promote them, the cleaning company that cleans their offices and the engineering company that supplies the machinery? Is it just the main weapons maker, or is the component suppliers that feed their factories, the finance company that helps the government arrange the borrowings to buy them and the legal firm who draws up the contracts?

It is of course possible to run ethical portfolios both using active management and passive management. ETFs allow you to concentrate investment on more moral areas like green energy, water, infrastructure, and on world markets where weaponry is not an important item. An active investor can leave out any named sectors or shares.

We are happy to handle client monies as they wish, but recommend not putting some ethical limit on the investment task. Our main reason is that the world is more complex than simply leaving out a few shares. The world economy is now very integrated. It takes thousands of people and many different companies and skills to deliver a tank or a cigarette to its end user. I keep my politics quite separate from my investing, and find it makes more sense to do it that way.