Prince Harry and Meghan, the Duchess of Sussex, recently announced that they have joined Ethic, an asset manager who describes himself as ‘ethical’. The famous couple’s stated goal is to encourage young people to invest âsustainablyâ – a laudable goal. Yet ethical investing is too often a smokescreen for asset management that allows large corporations to pollute, discriminate and pay rudimentary wages when they can. This announcement is therefore an important opportunity to talk about what ethical investing ways right now – and how it can be improved.
This announcement is an important opportunity to talk about what ethical investing means right now – and how it can be improved.
The vast holdings of asset managers – from big players like BlackRock and Vanguard to smaller entities like Ethic – give them unprecedented power over resource allocation in our economy. By law, their âfiduciary dutiesâ (the responsibilities companies owe to those whose assets they manage) prioritize profits over the preservation of essential social and environmental systems. This is the tension inherent in ethical investing of all kinds.
The way these tasks are currently defined means that asset managers are focused on increasing financial returns as quickly as possible. Ethics say it allows you to invest according to your “values”, but even they cannot prioritize investments with worse financial results. They can allow comparisons of better or worse impacts on society for companies with the same financial statements (which they say in this cheeky video).
This system is therefore antithetical to the needs of the same households whose savings are managed, not to mention society in general. Such misalignment creates relentless pressure on environmental systems, social institutions and the political process. Even companies that want to find a way to make money ethically are constrained by flawed fiduciary standards. It should be noted that only on Thursday the Ministry of Labor released a proposal that would allow asset managers to consider sustainability, although that would only apply to funds governed by the DOL.
Asset managers are supposed to be responsible for the real interests of households and the pension funds they serve. The question today is how we define our “interests” – and in the 21st century, they should no longer be defined only as financial returns. Everyone has a stake in our decarbonizing our economy, raising employment standards and living in a healthy and fairer society, including the people who use asset managers.
At the same time, American households that own financial assets – such as stocks and bonds that they hold in a retirement fund or 529 college account – have become largely fully diversified shareholders of stocks in the United States. companies, which means that their wealth is tied to the entire stock market, not just a small subset of companies. (The wealthier shareholders often take a more targeted approach via a somewhat complex system that allows some people to buy unlisted stocks.) This means that we bear all the effects of corporate ânegative externalitiesâ – an economic term that refers to when a business finds a way to avoid paying for the problems it has created. Think, a manufacturer of petroleum or chemicals that pollutes the environment and doesn’t have to pay for it. The climate crisis requires new rules to ensure that all asset managers are required to invest with the long-term interests of beneficiaries in mind, not just short-term profits.
In a recent article with Rick Alexander of The Shareholder Commons, we propose two specific areas for federal policy reform. The first is a substantial redefinition of the fiduciary duty of asset managers, so that managers must take into account the impacts of their portfolio on the common interests of their beneficiaries, including on the well-being of communities and the environment. . The second is a clear bottom line that requires portfolios to be carbon neutral by 2050 at the latest, in accordance with the Paris Agreement. Policymakers should revise the 1940 Investment Advisers Act and ERISA so that all asset managers are “accountable for the impact they have on the shared social and natural systems necessary for a just economic system.” , equitable, inclusive and prosperous â.
One would think that “sustainable investing” would solve this problem, and indeed, trillions of dollars are pouring into “sustainable” portfolios.
One would think that “sustainable investing” would solve this problem, and indeed, trillions of dollars are pouring into “sustainable” portfolios, perhaps according to this assumption. But as the former chief investment officer of BlackRock said, “[the] the industry knows that if they put ‘ESG’ or ‘green’ on something, they can make a lot more money out of it, âeven though there is no agreed definition of what a “sustainable” investment.
In other words, what qualifies a fund as âgreenâ or âethicalâ has no agreed limits; this is why, for example, even in a âFossil Fuel Reserves Freeâ fund, a certain percentage of the shares held could come from coal, oil and gas companies. Even when a fund only owns stocks of companies in certain industries, it is likely that its fund family will hold, for example, stocks of fossil fuel companies or companies in military industrial complexes in another fund.
The Duke and Duchess of Sussex say they want to raise awareness on issues such as social justice, climate change and income inequality. This is, of course, a good way to use their vast platform, but they should also use their position to call for real reforms that would make all asset managers who are truly accountable to the people and companies whose assets they manage. And they should recognize that new start-ups making different decisions are not enough – we need drastic changes so that not all companies continue to excuse environmental destruction and squeezing workers as just the cost. to do business, with asset managers justifying these behaviors as the cost of increasing financial returns.