The white-coated scientists and employees of every hue look buff and industrious. Click through the website, and you’ll find a “corporate responsibility” report filled with upbeat articles about civic engagement, flanked by photos of men scaling cliffs. The report’s sustainability chapter brags in detail about how the company is reducing its impact on the planet through initiatives to conserve natural resources and reduce emissions and waste. “We have an extraordinary sense of purpose to help create a better world,” they declare. The corporation’s name is Raytheon. In 2014, it made $23 billion in sales (US). Its product? High-tech missile and defence systems.
Raytheon is just one of hundreds of multinationals that wrap themselves in the mantle of corporate social responsibility, or CSR. No longer content to be mere delivery systems for profits and goods, the vast majority of publicly traded firms now sell themselves to conscience-stricken investors as enlightened bureaucracies. A generation ago, financial skeptics dismissed ethical equity funds, arguing that they underperformed. Today, they account for an impressive share of investment options. According to the United Nations, global equity pools representing $59 trillion (US) in assets have signed on to something called Principles for Responsible Investment (or PRI), a six-point checklist for promoting environmental sustainability, social benefits, and good corporate governance—ESG. In Canada, most banks and investment companies offer products that are SRI socially responsible investments. According to the Royal Bank of Canada, investments in funds with such progressive mandates make up 20 percent of all Canadian assets under management.
This posturing has led to a world of feel-good corporate messaging that is often detached from the product or service being peddled. Mining giants tout their philanthropy and good works in remote foreign locales. Energy companies earn billions burning fossil fuels while rebranding themselves with images of silhouetted wind turbines and grazing deer. Tobacco firms provide uplifting descriptions of environmentally friendly farming practices (one thing missing from their sites: photos of people actually smoking).
Such corporate Boy Scout–ism has also encouraged firms such as Volkswagen—a leading CSR proselytizer—to practise the kind of doublespeak that led to the scandal over its rigged emissions tests. Global capitalism is now green on the outside, sooty on the inside.
This is not entirely novel, even if modern branding practices have made it prominent. Money and morality have long been awkward co-travellers in the history of civilization—an entanglement that extends back to the earliest appearance of currency. “Pure greed and pure generosity are complementary concepts,” the American anthropologist David Graeber observes in Debt: The First 5,000 Years.
Graeber, however, is describing two independent forces that once were acknowledged to be in perpetual conflict. The CSR phenomenon of recent years offers something different: profit-driven enterprises piously claiming they can improve human behaviour—vice in the service of virtue, so to speak. But can money ever be a force for good?
Not everyone has bought into CSR’s brave new world. Smith & Wesson, for example, is a company that presents itself without a dab of whitewash. The NASDAQ-listed firm doesn’t update investors with news about fundraising campaigns or energy savings at its factories. It trades in fearsome weaponry and makes no attempt to conceal that fact.
Unsurprisingly, Smith & Wesson’s stock can be found in the portfolio of the Barrier Fund, a $260 million investment pool that invests exclusively in four categories of “sin stocks”—alcohol, tobacco, gaming, and weapons. It’s a fund that targets investors who know that lots of money can be made by catering to human weakness.
The Vice Fund, as it was originally known, was launched in 2002 by a small Dallas investment house, USA Mutuals. The company hired fifty-five-year-old Gerry Sullivan, a former Wall Street bond trader, to run the fund in 2011. Three years later, it was rebranded Barrier—a reference to the fact that the companies in his portfolio operate in sectors that are especially inhospitable to new competitors, and thus profitable (“barriers to entry,” in economic parlance).
But perhaps barrier also signifies that these firms face such formidable regulatory and legal challenges that they have to be aggressive about finding new ways to make money. Cigarettes are a case in point: years of costly product liability lawsuits in North America and Europe forced tobacco firms such as Philip Morris, Altria, and British American Tobacco to expand their market share in Asia and Africa—allegedly, in some cases, by targeting children. That marketing tactic, banned here, delivers dividends that mitigate the penalties imposed on the manufacturers in the United States, Canada, and Europe. (Altria’s stock has grown 1,600 percent since 1990; the company generates enough cash to buy back billions in its own stock and thereby keep its share prices high.)
The ethics of those returns, one might say, are in the eyes of the shareholder. Sullivan’s got no objection. Indeed, the approach is one likely reason that, since the fund’s inception, Barrier’s average annual return has been 9.3 percent, slightly higher than the 8 percent generated by Standard & Poor’s 500 blue-chip index.
At his home office in a leafy New Jersey suburb, Sullivan led me into his wood-panelled den, decorated with samples from the fund’s various holdings—including spherical bottles of a high-end vodka made with water from Hawaii, and a flask of fine Kentucky bourbon. A member of the National Rifle Association, he keeps his father’s polished shotgun in a leather case under the bookshelf and an unloaded handgun in a safe in the wall. “You never know,” he says.
Sullivan acknowledges that the products and services the fund invests in may be distasteful to some, but none violates any law. You can say something else about his companies: they lack pretense. It’s easy to loathe the tobacco industry and its cynical practices, but all sorts of global firms, including those cloaked in social responsibility, play a version of the regulatory arbitrage game: in countries with stringent laws, they follow local rules, while in other jurisdictions with lax environmental regulations and corrupt officials, they despoil rivers and grease palms. Loblaw is a Canadian example. According to the company’s CSR report, the grocery giant contributes money and goods to community and environmental programs. But the firm also allowed a division, Joe Fresh, to source clothes from an Asian supplier working out of a Dickensian sweatshop that collapsed, killing more than 1,000 workers.
Such global firms, in short, emit bracingly hypocritical messaging—presenting themselves as upstanding corporate actors whose ethically burnished shares can be purchased by principle-driven investment funds.
Sullivan, however, has no time for the CSR propaganda. The point of the Barrier Fund’s portfolio is that there’s plenty of profit to be wrung from firms that make harmful goods. Investors, he argues, shouldn’t try to maximize their returns while making moral judgments about the companies they’re betting on. “If it’s a bad product,” he shrugs, “make it illegal.”
The modern trend towards responsible investing principles can be traced back to the 1960s, when church, peace, and student groups began to press investment funds to dump shares of arms dealers and firms doing business in apartheid South Africa. The divestment movement spread to tobacco in 1990, when Harvard University sold off its cigarette holdings and other universities followed suit. Outside academe, many pension and investment pools have since adopted a more pragmatic approach, signing on to international consortia of funds that claim to pay attention to socially responsible investing principles.
In fact, just about every working Canadian contributes to one such capital pool—the Canada Pension Plan Investment Board, which manages $265 billion in assets and ranks as one of the world’s ten largest retirement funds. The CPPIB says it considers environmental, social, and governance factors when picking stocks and claims to be “guided” by the UN’s PRI, of which it is a founding signatory.
Feel good? Then consider this: the CPPIB invests in many of the same firms as the Barrier Fund. It doesn’t buy gaming stocks directly, but it holds shares in almost all the same weapons companies as Barrier, including both Raytheon and Sturm, Ruger & Company, the largest handgun manufacturer in the United States. The CPPIB and Barrier also share similar tastes in alcohol companies. As for cigarettes, the CPPIB’s holdings overlap with Barrier’s, and include the likes of Philip Morris and British American Tobacco.
The CPPIB is hardly unusual. The same can be said of many large fund families—including those that claim to adhere to responsible investing principles. RBC, for instance, controls about 5 percent of Smith & Wesson shares. All of which is to say: Canadians seeking to reap the profits from booze, bombs, and butts don’t actually need to buy shares in the Barrier Fund. All we need to do is pay our taxes. As Sullivan says, “You are holding sin stocks without knowing it.”
In October, the World Health Organization’s International Agency for Research on Cancer concluded, on the basis of its scholars’ examination of more than 800 studies, that processed meat is “carcinogenic to humans.” Will we see university endowments sell their meat-processing stocks, or tobacco-style regulations mandating food labels showing images of cancerous abdominal growths?
Unlikely. But this example underscores the difficulty of imposing crisp moral categories on investor behaviour in a top-down way. It’s far easier for consumers to assert their principles. If I have a problem with veal or slot machines or handguns, I can join like-minded people in lobbying politicians to change the law or, more simply, I can boycott those products and encourage others to follow my lead. (Vice consumers understand such tactics, too: Smith & Wesson almost went out of business fifteen years ago, when its support for gun control led to customers refusing to buy its products.)
For investors, the calculus is more complicated. If you want to fight climate change, you can shun energy giants such as Exxon Mobil. But what about those firms that produce both dirty and clean energy? Or car companies that make both gas guzzlers and hybrids? Virtually every high-tech company in your portfolio manufactures at least some of its gadgets in foreign plants that would be shut down in a heartbeat under Western labour laws. Maybe you’ll insist on sinking your money into something high-minded, such as the Domini Social Equity Fund, which describes itself as geared to those “who understand that the way we invest shapes the world that we and future generations will live in.” If so, you should know that Domini owns shares in companies accused of sweatshop labour practices (Gap), unhealthy products (Coke), and dicey environmental records (3M).
Where to draw the line is a problem that affects funds on both sides of the ethical divide. Barrier, for example, doesn’t invest in porn, or in food brands that specialize in addictive products—pop, candy, chocolate, chips, or fatty fast-food offerings, all of which pose health threats. There are no risqué dating sites, payday-loan chains, or companies that buy out the life-insurance policies of the ill and the elderly (these firms earn profits by making actuarial bets on the longevity of their customers).
Divestment campaigns, such as those targeting university endowment funds, may also create unintended consequences, according to Eric Kirzner, a University of Toronto finance professor who has studied socially responsible investing. When large institutions sell their shares and drive down the price, he says, they create buying opportunities for investors who buy cheap stocks in firms that sell things people use all the time, including cigarettes. Such moves, in other words, aren’t punitive; they merely shift around the allocation of profit. “Can you really drive away value through your activities? ” Kirzner asks. “It’s doubtful.”
I’d be happier if the CPPIB publicly rejected the profits of tobacco, but I can’t pretend such moves impair the industry’s ability to do its dirty work, because other investors are poised to scoop up the profits I reject. I’d also prefer that the minuscule fraction of the CPPIB’s assets that come from my taxes didn’t go to a firm making the handguns that turn up at crime scenes. Yet even that moral clarity soon fades. How I feel about a company like Boeing, which makes passenger jets and bombers, or a brewing giant—I love beer, but I know it causes addictions and ruins lives—is harder to parse.
The unstated premise behind CSR is that, in our secular and consumerist society, capitalism itself must now become a vehicle for promoting the better angels of our nature. It’s as if we want our portfolio managers to be part-time philosophers, imbued with both the wisdom of King Solomon and the acumen of Warren Buffett.
In a way, the debate about sin stocks—and whether they belong in an investment portfolio—is yesterday’s conversation. The focus of investor activism today is global warming and how to deal with companies that produce dirty energy or make wasteful products that accelerate climate change.
Increasingly, the energy and natural resource sectors seem to exist in a moral grey zone—their output eagerly consumed by an ever-growing global population, but also implicated in extensive environmental destruction. Some institutional investors—for example, Norway’s sovereign fund—have sought to assuage their guilt by selling shares of companies that pump carbon into the atmosphere. Others are looking to invest in green energy firms, reckoning that as regulators move to tax carbon emissions, traditional utilities and oil companies will become less profitable.
But many funds, even those that have signed on with SRI networks, hedge. They still invest in carbon-intensive firms, arguing it’s better to use their clout as shareholders to pressure such firms to clean up their act.
It’s all soft diplomacy, in other words. But does this form of suasion let corporate polluters off easy? Many huge ESG funds convey the impression that progress is taking place—just look at all those impressive signatories to the UN PRI and the huge sums of capital being wielded in the service of a better future. But what if this show of corporate responsibility merely allows politicians to avoid the tough work of promulgating unpopular and job-destroying laws?
Individual investors and pension plan members may be deeply troubled about climate change. Certainly, many see the creeping destruction of the natural environment in explicitly moral terms. Yet the practical reality is that fund managers with a fiduciary duty to investors can’t simply avoid these sectors wholesale. “To take carbon out of a portfolio would have an impact on how the portfolio would perform,” says one Bay Street manager.
“The call is often for divestment,” says Jane Ambachtsheer, a partner at the Mercer consulting firm, who advises large investment funds on how to make their portfolios more sustainable. But she argues that it might be more effective for these funds to use their portfolio shares as a means of pressing executives in the companies to change their operations. “Influential investors who place a high risk outlook on certain sectors, like the oil sands, can have an impact,” she says.
But as yet, there’s little evidence that energy, mining, or natural resources corporations will have any long-term trouble attracting investors, including massive institutional funds that claim to invest responsibly.
Ultimately the dynamic will shift only when governments muster the resolve to take action and deal with the undesirable consequences of unfettered market activity. A Bay Street portfolio manager offers up a story about investor consequences following political action on climate change. “We made a lot of money in ESG by analyzing European utilities,” he explains. The manager ignored CSR reports and instead zeroed in on green energy companies that had seen their profits rise steadily after the European Union slapped a tax on carbon-emitting power plants. “For us, owning companies in renewable generation made a lot of sense,” he said. “A lot of that was driven by the rules that were put in place.”
In other words, those investments had nothing to do with responsible corporate governance and soothing imagery. Rather, European governments responded to public opinion and changed their laws to promote the sort of energy they believe will not alter the climate. The utilities had no choice but to respond, and the profits flowed accordingly.
This appeared in the January/February 2016 issue.