Politicizing Investing

The three topics you are supposed to avoid at dinner parties are money, religion and politics. But why avoid the most interesting topics one could discuss, especially when you can see your conservative father and liberal aunt have it out over the peach cobbler? Politics has increased their influence in investment decisions in a way that I have not seen in 20 years as a financial advisor though this is not a new phenomenon. The modern origins of political and ethical investing can be traced back to the Quakers in 1758 prohibiting members from participating in the slave trade. Terms like environmental, social, governance (ESG), impact investing, socially responsible investing (SRI) have been used but for the purposes of this article, I am going to use ESG as a generic phrase. For the record, I describe myself as politically agnostic so define that however you like.

13 years ago, I had a conversation about ESG with a client who wished to be ethical in their investing, but I had no deep understanding of the topic at the time. The only thing I knew was there was a mutual fund company called Ethical Funds (since purchased by NEI) that specialized in this. We had a number of conversations, I looked at what I thought was Ethical Funds best mutual fund for them and invested into it. Fast forward approximately 18 months and in a market that had returned approximately 10%, they were flat. Not happy with the result we nixed Ethical Funds and returned to a more traditional portfolio of individual stocks and mutual funds, and returns came back to what the expectations for their money were. This experience sparked my curiosity in ESG, and I began doing research on the topic which resulted in me writing a seminar on the subject 11 years ago. I came to a number of conclusions.

1. The root word in ethical investing is ‘investing’. If you want to be ‘ethical’ full-stop, take your money out of the market and donate it and your time to causes you are passionate about. When you invest, there is a profit motive, and this is the primary motivation. All other considerations are secondary.
2. There are no perfect investments. There are obvious investments that some people avoid, and this makes decisions easy, like arms manufacturers or tobacco companies. Things get opaque when you are trying to decide on a company that might have excellent labour conditions for their employees, but you don’t like how they make their product. What is the greater consideration to you?
3. The political party in power is not a predictor of market returns. Research Affiliates, an asset allocation shop out of Newport Beach, California, conducted research in 2017 across developed economies and came to the conclusion that no persuasive relationship exists between party in power and stock returns.

Remember that investing is about a profit motive. I have had some interesting discussions around how politics can impact someone’s investments. A conversation with a client in regard to the Walt Disney corporation (DIS) and their choices implied that the company was more interested in making political statements than making money. While “go woke, go broke” is a pithy phrase, it’s fairly nonsensical as the concept of “woke” is not really a thing in capitalism regardless of how you define it. No major corporation will sacrifice profit over politics, especially when you have a board and shareholders to answer to. When it comes to politics affecting your investment decisions, judge the investment on its ability to provide a return first. Once suitability is determined based on risk and return, then consider your ESG guidelines and determine what compromises you are willing to make.

When making ESG decisions you have two broad choices, inclusionary or exclusionary. Inclusionary investment strategies are the convenience of institutional investors like pension funds or mutual funds. An inclusionary investment strategy from an ESG perspective means that a fund can own a particular company’s stock and engage with that company to enact changes. An exclusionary investment strategy means that you don’t invest in a particular company or industry at all. For an individual investor, an exclusionary approach is the only practical way to engage in ESG investing as most of us don’t have enough money to buy our way onto a corporate board and engage in whatever activism we feel needs to happen.

ESG is fundamentally about risk management and the concept of socially responsible investing (SRI) is a philosophical exercise for investors. Remember if you are excluding investments because you think Patagonia is woke, GlaxoSmithKline makes vaccines, Canadian Natural Resources produces oil or Tim Hortons doesn’t use fair trade coffee, these are all ESG/SRI considerations. ESG doesn’t exist on only one part of the political spectrum and comes down to the individual. Everyone has different concepts of morality when investing, so don’t let perfect be the enemy of the good.