Some historical notes.
Let’s retrace some recent steps that have led to awareness of the importance of investing in a responsible and ethical way. In 1968 the Club of Rome was born, a non-governmental association of scientists, economists, businessmen who commissioned MIT to publish “The Limits to Growth”, in which are theorized the sustainable growth and the management of non-unlimited resources, based on a mathematical model.
In 1980, apartheid in South Africa pushes the international community to denounce the segregation and the poverty of the black population. The boycott of South African companies that follows will contribute to the end of apartheid. In the United States, the first motion of active shareholding takes place at the General Motors assembly criticized precisely for commercial relations with South Africa of apartheid.
Also in the United States, in 1999, the first global ethical index was launched, the Dow Jones Sustainability Index, followed in 2001 by the Ftse4Good in the United Kingdom.
In 1997, almost all countries signed and ratified the international treaty of the Kyoto Protocol on global warming. This treaty will be followed by the United Nations Conference Doha 2012 and in 2015 the Conference on Climate Change in Paris and the United Nations Sustainable Development Goals.
In 2006, the United Nations, following the scandals of some multinationals, launched the Principles for Responsible Investment (PRI), six principles to spread sustainable and responsible investments.
In 2018, the European Commission adopts an Action Plan in order to mobilize funding for sustainable growth. These are the first regulations that include: a uniform classification (taxonomy), disclosure obligations by managers, new low-carbon benchmarks (low-carbon emissions model) and advisory services to clients on the sustainability. Standards and certifications are created for Green Bonds and for the launch of “green” equity indices.
In 2019, at the Business Roundtable, one hundred and eighty-one CEOs of the largest American groups declared that it was no longer necessary to maximize profits for shareholders but to maximize the interests of all stakeholders: shareholders, workers, community and environment.
How can you create strategies for an ethical investment?
The reference texts or publications are obviously personal choices of the investor. To give an example, an investor who follows a Christian morality might decide not to invest in companies that produce abortion products, while another investor always with an ethical but “secular” approach might not rule out an investment in companies that produce abortion products, evaluating these as ethical.
Another example could be not investing in T-Bonds, US public debt securities, which could be judged unethical by an investor because the United States is a country where the death penalty is federal law for some states. A Christian investor could even decide to invest only in companies from Christian countries regardless of which those countries are.
In deciding the ethics of an investment, the personal judgment of the investor and the chosen evaluation parameters have a great influence.
An ethical investment is considered as such when it is not invested in controversial sectors, i.e. in sectors that can cause damage to reputation, in contrast with new regulations or that may face sanctions, or directly by not investing in these companies that are part of controversial business areas, both by not investing in their value chain and in their subsidiaries or holding companies.
The controversial sectors are, for example, gambling, the tobacco industry, pornography, civilian weapons, unconventional weapons of war, nuclear power plants, coal power plants, predatory lending, research with the use of genetically modified organisms or with the use of fetal stem cells, animal tests for non-pharmaceutical products.
Ethical investment strategies.
There are different investment strategies that can allow to analyze ethical investments in a more specific way.
The Social Responsible Investing (SRI) strategy provides investors with a method of not investing in an unethical way or in a way that is not in line with certain values. This adopts a negative screening that excludes companies in certain business areas, such as companies that produce weapons for civilian use or unconventional weapons or that operate objectively unethical practices such as the exploitation of child labor. This strategy aims to pursue maximum financial returns and mitigate environmental, social and governance ESG risks.
The Sustainable Investing strategy, on the other hand, in addition to using negative screening also uses a positive one through the “best in class” approach that integrates ESG factors to seek greater earning opportunities. For example, by investing in less polluting companies, the best positioned ones will be selected in order to obtain a greater competitive advantage.
Other types of strategies are the norms-based screening which only follows internationally recognized standards; the thematic investment strategy; there is the activity of engagement, that, at the level of asset management, consists in intervening in the decisions of the companies through the exercise of voting rights in a responsible manner and in dialoguing with management and the board of directors of companies by promoting ESG values.
Finally, the Impact Investing strategy consists of investing in companies that allow the investor to hope for a good return while at the same time contributing to social and environmental growth, thus creating a positive economic and social/environmental impact.
Mr. Michele Mifsud. Chartered Financial Consultant of Italian
“Organismo di vigilanza e tenuta dell’albo unico dei consulenti finanziari”
