With so many companies claiming to do good for the world, how can we tell if they’re really making a difference? Our Head of Ethics Research Dr Stuart Palmer shares Australian Ethical’s process for determining if a company is good or bad before we invest in them.
Investing for financial security and a positive impact
We think investing is important not only for financial security but also for the positive impact it can have on the world. Our experience is that you can achieve both.
We invest in accordance with the 23 principles of our Ethical Charter, which require us to consider the impact of all potential investments on people, on animals and on the environment.
Here are four of the questions we ask to tell the difference between good companies (which we’ll invest in) and bad companies (which we won’t).
1. What are all the impacts of the companies’ products?
We look at the entire impact of the companies we choose to invest in. Companies who have positive impacts will invariably also cause some harm. This is what we need to balance.
For instance, we invest in wind farms, for the carbon-free electricity, they produce which we desperately need to limit global warming. But we also know wind-turbines can cause harm to people and animals, like birds which fly into them. For this reason, we also investigate what measures wind energy companies are taking to minimise these ‘bird strikes’.
We also compare the harm caused to birds by wind turbines, to the harm caused by alternative sources of energy, such as mining and burning coal. And finally, we consider the big picture, looking at the impact and harm climate change will cause to all living things if we don’t produce more renewable electricity.
2. How do people use the company’s products?
Some products are positive because they are enablers; they help people and companies do good things better. But these same products can also make it easier to do bad things.
A good example of this is 3D printers. 3D printers can improve the efficiency of manufacturing and reduce its environmental footprint. Because they’re very flexible, they also encourage rapid innovation.
However, these clever printers can be used to print both good and bad things. Their technology has advanced to the point that they can be used to make gun parts – allowing users to manufacture guns by simply downloading the right software.
So when we’re thinking about the ethics of 3D printing, we look at the action companies can take to guard against misuse of their printers. Stratasys is a 3D printing company we invest in. A couple of years ago, they repossessed one of their printers when they discovered it was going to be used to make guns.
We have similar challenges looking at a social media company like Facebook. We think social media can help people do great things, like stay in touch, share news and information and access entertainment.
On the other hand, we know social media can invade privacy, propagate fake news and feed our insecurities and anxieties. There’s growing research that shows the more we use social media, the unhappier we are.
The great ethical challenge for many social media businesses is that they have developed business models which in many cases actually encourage these negative impacts.
There’s an organisation called Time Well Spent which is working to change this, so that digital media does a better job of helping and not hurting people. Part of this work is encouraging social media companies to build algorithms and revenue models that better align the interests of users, advertisers and shareholders. We also need to build public awareness of the potential harms of social media to encourage its use through conscious choice rather than out of habit or boredom.
3. How are the products produced?
It is very important to look at how a company treats their employees and local communities, as well as the environmental impacts of the way products are made.
We invest in Tesla which relies heavily on cobalt in the production of batteries for its cars and for electricity storage for homes. The majority of the world’s cobalt originates in conflict zones in Congo, a region where there are widespread breaches of human rights including use of child labour.
So we ask questions about how Tesla monitors its suppliers of cobalt (and their suppliers) to safeguard against human rights breaches. We ask how Tesla supports the reuse and recycling of cobalt in their batteries and we ask about their R&D to reduce the amount of cobalt needed to make their batteries.
4. How does the company market and sell its products?
There are many products which can in principle be produced and consumed sustainably, but which aren’t in practice because of overconsumption.
All too often this excess consumption is encouraged by company marketing. We think that a core purpose of ethical sales and marketing is to help consumers make informed, considered choices about whether they need or want a product. Unfortunately, the art, science and industry of sales and marketing have not been built around this purpose. We’re constantly exposed to images, messages and nudges designed to push our cognitive buttons to buy things unthinkingly.
Australian Ethical won’t invest in a company which systematically misleads and manipulates its customers, no matter how sustainable its products are.
Answering the questions
The first step is identifying the many important questions to ask if we want to understand if a company is, on balance, good or bad. We then face the challenge of gathering the information we need to actually answer these questions.
And on this front, as investors and consumers, we face the ever-present risk of corporate spin and green wash. We are very suspicious of companies which tell feel good stories about their products and operations without backing this up with the hard information we need to answer our specific questions about the impacts and uses of their products, and how they are manufactured.
Even when a company provides transparency into their products and operations, there’s still the question of reliability of their information, and how easy is it to make sense of all the information.
This is where it’s important to look beyond company information and to draw on other sources. Sources like research and analysis from government, scientists, industry and civil society, like the Baptist World Aid report for ethical fashion. This final step is about sharpening up your bullshit detector.
Our ethical analysis of a company’s diverse impacts combined with our rigorous investment process seeks out investments which offer both financial security and a positive impact on the world. We believe that you can have both. You just have to know what you’re looking for.