Exclude or be a responsible investor? You can't be both
Responsible investment – ie. nudging (or more) investee companies towards sustainable business models - is at the heart of modern institutional share-ownership. It relies on being a shareholder in a business, which is why many investors in the LGPS and elsewhere state in their investment policies that they prefer to engage rather than to exclude. Shareholders who care are more likely to persuade companies to alter their behaviour than those who don’t.
In contrast, charities tend to exclude companies whose activities are opposed to their own objectives, and campaigners put pressure on other investors to exclude sectors such as tobacco, armaments and fossil fuels. The argument is that if demand for a share is lower, the price will fall, making it more expensive for the company to raise money through bond and equity markets (and incidentally sending executive share options into negative value).
At Linchpin we see some significant inconsistency here. If you don’t own alcohol shares, for example, how can you influence them to behave better? If you don’t own oil shares, why would they listen to your views about climate change? Are companies such as Sports Direct going to listen to non-shareholders?
Reality is of course not black and white. There are some activities which are generally beyond accepted social acceptance and sometimes banned by international conventions (eg. some kinds of munition manufacture). Exclusion is hardly controversial here: the question should be why a listing authority permitted the company to list.
For charities with a specific focus, there may well be justifiable concerns that donors will be put off. Could an anti-tobacco charity hold a tobacco company? We would still argue it will have more influence from the inside but the reputational risk argument may understandably carry more weight with its trustees.
At Linchpin we are firm believers in investing responsibly and we would challenge those who exclude simply because it’s easier. The effect of exclusion on companies is often to push them towards becoming private again. They may then be out of sight but their behaviour won’t have changed. We think responsible investment, and here we mean engagement, is both more likely to effect change and add value. Compared to exclusion, that is win-win for investors.
Our message for investors would be to consider carefully the reasons for any exclusions. Find out how Linchpin can help you here.