Principles of ethical investing

December 29, 2020 • 9:15 am

by Greg Mayer

Investment policies–that is, where and for what reasons individuals and organizations place their money–have been at times invoked as a way to either encourage good behavior or sanction bad behavior. The most prominent example I know of is the campaign for divestment of assets from companies that did business in South Africa, which took place during the late apartheid era. Apartheid of course did end; I don’t know what role the divestment campaign had in this outcome. I imagine it is something historians have studied, but I don’t know the conclusions reached. The most prominent such campaign now is directed against Israel.

For individuals, picking stocks, market timing, and day trading are generally bad investment strategies. (“Bad” in the sense that you can’t reliably make money that way.) But large institutional investors have enough money, time, and expertise to vet investments for the behavior of the companies and assets involved. CalPERS, the California state employee retirement and benefit system, which manages a portfolio worth more than $400 billion, for example, has a fairly detailed set of Governance & Sustainability Principles.

Last month, on November 13, I received the following message from the Society for the Study of Evolution (SSE), indicating that the Society wanted to develop its own set of principles. (I’ve removed links to SSE’s internal web pages and information about individuals.)

Dear Gregory,

Earlier this year, at the request of SSE Council and the Finance Committee, SSE formed a committee to develop a set of ethical principles to guide the Society’s investments, which have a current value of ~$4.3M (learn more on the Financial Reports page). The committee’s proposed ethical principles can be found in this document.

To develop this set of principles, the committee surveyed the principles of other societies and considered different elements of a policy that are consistent with the mission of the Society and the values of our community. The goal of the committee was to develop a set of principles, not to specify exactly how to invest, which will be determined based on these principles in consultation with our investment advisors. We also note that using ethical principles to guide investing does not necessarily reduce financial returns and may even increase them.

We value our members’ feedback on these proposed ethical investing principles. Your input will help Council decide how to manage SSE’s investments and overall financial plan moving forward. Would you be willing to review the 1-page principles document and provide feedback in a short survey?

Or click here to view the document:

Or click here to view the comments form:  We will be collecting comments until November 30th, 2020. Thank you for your participation!

The draft principles were as follows.

Ethical Investing principles

The Society for the Study of Evolution is committed to investing in ways that support companies whose business practices promote environmental sustainability and social justice and whose governance promotes transparency. The SSE will use these values to guide investment decisions.

Environmental values

The Society for the Study of Evolution favors investment in companies that

  • Foster the protection of biodiversity.
  • Contribute to preservation of a safe, liveable, and stable climate.
  • Avoid increasing the risks associated with climate change.
  • Limit the use and discharge of toxic chemicals and pollutants into the environment.
  • Encourage practices that avoid overexploitation of terrestrial, aquatic, and natural resources.

Social values

The Society for the Study of Evolution favors investment in companies that

  • Respect and promote human rights, dignity, and well-being.
  • Protect personal data and respect customer privacy.
  • Foster an inclusive environment for all workers regardless of background or personal characteristics.
  • Improve and adopt anti-racist policies.
  • Follow practices that respect the dignity and rights of workers, including the ability for collective action by workers.
  • Strive to reduce disparities in economic and educational opportunities.
  • Respect the autonomy and voices of local communities and indigenous people.

Governance values

The Society for the Study of Evolution favors investment in companies that

  • Have a Board of Directors reflecting the diversity of communities they serve.
  • Ensure that financial reports are regularly reviewed by external auditors overseen by Board members who are not employed by the company.
  • Follow international standards to guard against fraud and corruption.
  • Commit to fair wages and equitable sharing of profits.

I wrote back to the Society on December 23:

When I received your invitation to participate in a survey concerning proposed investment principles for SSE, I began filling out the survey, with my initial response being that it was OK, but with minor changes. But as I attempted to compose a response, my “but” overwhelmed my “OK”, to the point that it became hard for me to see how the entire notion of a set of principles could survive.

Some of the principles are straightforward accounting principles– using external auditors, for example. The “Environmental values” do touch on some areas in which SSE could be said to have expertise– evolutionary biology is, after all, the study of the temporal and spatial patterns of biodiversity and the processes that generate them. But I note that these values are expressed without any endorsement of specific policies. “Foster the protection of biodiversity” is sufficiently broad that it might be a worthy principle to endorse. Ariel Lugo, who maintains that introduced species foster biodiversity, and Peter Marra, who argues that introduced species are a great threat to biodiversity, could both agree. I happen to think Marra is nearer to right on this, but I wouldn’t want the SSE to proclaim one or the other. On biodiversity, evolutionary biology does have disciplinary expertise, and intellectual standards for the evaluation of evidential support for propositions, so I could see some reason for the SSE to have something to say in this area.

But many of the proposed principles lie far afield from the values of science in general and evolutionary biology’s particular expertise. And it’s in those areas where evolutionary biology has the least to say that the principles try to say the most. Three examples.
“Improve and adopt anti-racist policies.” Anti-racism, sadly, is not opposition to racism, but a particular racialist ideology espousing an essentialist view of “races”, according to the ideology’s own notions of what “race” means. Anti-racism, which is fundamentally racialist, is sometimes even overtly racist. SSE should have no position on “anti-racism” whatsoever.
“Follow practices that respect the dignity and rights of workers, including the ability for collective action by workers.” ​I personally believe that the decline of unions has been a major factor in the growing concentration of wealth in the hands of a very few in the United States, and that this lack of equitable distribution of the fruits of economic progress is the greatest problem facing the United States. Its solution is of the utmost consequence for the future of the country as a democratic republic. But why would SSE have a position on this? If an evolutionary biologist in the United States supports his state’s anti-union “right to work” law, this has no necessary relation to his work as an evolutionary biologist. Why should such a person have his political views on an issue unrelated to evolutionary biology be repudiated by SSE? I don’t expect or want SSE to endorse my views on “right to work” laws, and I equally don’t want it to condemn the opposite view.
“Respect the autonomy and voices of local communities and indigenous people.” ​This is perhaps the most bizarre of all. Why should SSE have a view about the proper relations between levels of government? Are local communities always, or even usually, right about political, social, and moral issues? South Carolina wanted local autonomy over slavery in 1860. During the civil rights era, it was Federal override of the autonomy of local communities that brought about social progress. And what about today? We’ve seen wealthy local communities put up gates and threaten protesters with weapons– is that what SSE respects? And what about the wider world? Does SSE have an opinion on the fate of Nagorno-Karabakh, many of whose local residents want to be annexed to Armenia? The indigenous people of Hungary seem eager to keep out refugees– it’s their blood and their soil– does SSE respect this, too? Whether local autonomy or higher-level intervention has done more to bend the moral arc of the universe towards justice has varied from time to time and place to place. SSE need not engage with the question of under what circumstances local autonomy promotes justice, because it should have no opinion or policy on the matter at all.
There is, of course, a sort of reductio ad Hitlerum– “You wouldn’t want to invest in Krupp gun works or the makers of Zyklon-B during World War II,”– and, of course, you wouldn’t. But extreme cases make bad law, and do not provide a basis for the proposed principles.
A scientific society may legitimately advocate for science and for scientific values, especially as they pertain to the disciplinary expertise and intellectual standards of the society. But it is no part of the remit of such societies to take up positions on general social, political, and moral issues. Indeed, one of the values of science is to not allow popular passions, fashions, and prejudices to color what should be epistemic considerations.
I realize that this comes after the deadline of November 30, and thus will not influence the form of whatever policy you adopt; the response timeline, coming as my campus prepared to move to all virtual instruction over Thanksgiving, did not leave time for a considered response given my other commitments at that time. With the semester now over and with time to address the issues, I share my views with you in the hope that they might add to your understanding of them; feel free to share this with your colleagues among SSE’s officers and committees.

I received a cordial reply saying that all feedback will be considered.

Some sort of policy, such as following accounting principles, is desirable, but that sort of policy almost goes without saying. (I belong to several scientific societies; I don’t know what, if any, formal policies the other societies have.) But such a policy should address universally accepted accounting and governance principles, and perhaps concerns for which the Society possesses special disciplinary expertise and intellectual standards.

Have any readers encountered similar quandaries with organizations and institutions with which they are involved?

26 thoughts on “Principles of ethical investing

  1. Greg- This is an extremely complicated topic and I agree with one point you made about not making any decision favoring one ideology over another.

    The $4.3 million for this organization is like pouring a thimbleful of water in the ocean. Due to the fiduciary responsibility of this organization, they should not be investing in stocks at all and should probably be putting their money in very conservative bonds.

    1. I disagree with your assertion the organization should be eschewing stocks and investing in conservative bonds. With such an investment they would be almost certain to lose money to inflation risk every year, year after year. Such a move would likely protect the principal but eventually would have little buying power. Bonds can also face loss of principal on the open market if interest rates rise as well as facing the prospect of total loss should the country default. While this may appear to be a low risk event current events in the US points to future instability and an inability for government to fix many problems it is facing possibly including civil unrest. USA debt suggests America is unlikely to raise interest any significant amount, bonds are likely to continue to give very low returns for the foreseeable future.
      Currently the most conservative bonds, US Treasury notes return about 1.5 percent, roughly half of inflation.

      Acceptable risk would be determined by the investing timeline, purpose of the fund, the emotional intelligence of the persons who are in charge of the fund and other factors.

      While the fund may not need to grow, it should at least keep up with inflation and with a suitable mix of investments and cash it would do so with little risk. I would suggest they should keep away from individual stocks and invest in broadly diversified index funds that are passively managed with extremely low fees.

      This would probably exclude ‘ethical investing’.

      I would like to see sources for their claim “We also note that using ethical principles to guide investing does not necessarily reduce financial returns and may even increase them.”
      I note the “not necessarily” and “may”.

      I agree ethical investing is a very complex subject. It reminds me of the TV series “The Good Place” where they eventually realize human decisions are now so intermingled and complex that it’s virtually impossible to live or even figure out if a purchase is ethical.

      There is often outrage over third world sweat shops but people flock to these jobs and the jobs and even minimal pay give them choices they otherwise would never have. They have taken entire countries out of poverty and modernized their economies. Women who would otherwise wind up being stuck in an unwanted arranged marriage were able to chart their own future.

      There are companies that do obvious harm, lie and sow disinformation, I’m thinking some tobacco and oil companies.

      On the other hand the shares are almost always already in existence, not new shares or companies going public. Not investing makes very little difference to the companies bottom line or share price.

      One of my pet peeves is compensation of executives. The problem is so ubiquitous in US public companies it’s impossible be in the US stock market and not support companies that overpay their executives. If you aren’t in the US stock market you aren’t diversified enough.

  2. Suppose a Company employs a 25-yr-old worker, and one day a video goes viral showing that, when they were aged 15, that worker — those of a sensitive disposition may want to look away now — sang along to some rap lyrics!

    If the Company refuses to fire them, do you dis-invest because the company is not following “anti-racist policies”?

    Or if the Company does fire them, do you then dis-invest because the company does not “respect the dignity and rights of workers”?

    Hmm, tricky.

    1. I have not personally encountered this dilemma with any organizations. But that does not stop me from having an opinion.

      While I am sympathetic to the goals, spending an inordinate amount of time poring over investment prospectus is a fools errand, especially for the relatively small sum of money involved. Invest in a broad base of stocks and bonds in order to maximize the return on the investment. Then spend the time saved in making sure your organization operates in an ethical manner. At most you might choose investment funds that exclude say, fossil fuel companies for example.

      The alternative will likely result in a loss of earnings and the eventual demise of an otherwise good and ethical organization. And there is no good in that.

  3. The indigenous people of Hungary seem eager to keep out refugees– it’s their blood and their soil …

    Or at least the portion of it that supports Viktor Orbán’s Fidesz party.

  4. As a general rule I would not find sanctions a very effective strategy to achieve anything. I have not had any particular group or firm ask me about it but my answer would likely be no. I think this is more something for someone to do on a personal level, such as some group or firm you invest in. If you do not like the stocks or whatever they are doing then stop using them. But to create sanctions as a group or even a county I don’t see it. The U.S. is famous for loading up economic sanctions against other countries and most of these are proven to not work or to obtain what you want. It is lazy diplomacy – you are not good enough to get what you want through talks or other ways so just sanction them. Mostly it does not work, hurts the wrong people you are after and you look stupid.

    1. Who was the longest-lasting leader of a country in recent history? Who attracted the most sanctions?

      I think the answer to both is Fidel Castro.

  5. Grania, who lived in South Africa in those times, always told me that she didn’t think the boycotting did much to end apartheid. It was, she said, more that the times were changing, and people’s morality with it.

    1. The boycotts just made the country more insular. Constructive engagement would likely have changed things faster.

      Among the whites, one third would support apartheid whatever, one third were opposed to it whatever, and the other third were persuadable to end it, so long as they could be persuaded that it would not lead to a Zimbabwe-style meltdown. In the end, Mandela managed to persuade them. Sadly, none of the subsequent leaders have been remotely of his calibre.

      1. Constructive engagement?
        I think “the times were a changing” Here in NZ we stopped playing them in the apartheid’s national game, Rugby! No black players were in their teams.
        We showed ’em we meant business. We protested like we had never before over the last full Springbox tour… rugby fans here were divided including families. Dive bombing Eden Park the home of rugby in NZ by plane with bags of flour…
        What it showed we kiwis weren’t going to tolerate it anymore. The All Blacks always had Maori and Polynesian players in them. It became a farce to play an all white (South) African team.
        It amounted to pressure at the right time so in some sense it was constructive engagement.

        1. I suspect that the tactic: “Yes, we’ll tour, but only if the stadiums are desegregated and only if your team includes at least N non-white players” (with additional demands each subsequent tour) would have worked better than the tactic “we won’t tour until you’ve abolished apartheid” (coupled with the slogal “no normal sport in an abnormal society”).

          But I accept that opinions can differ on this, and that we lack a control experiment.

        2. When it comes to boycotting athletic programs or events, I think there’s a line to be drawn. I don’t believe it should be done on the basis of a nation’s policies collateral to sports. (I thought the US boycott under Jimmy Carter of the 1980 Olympic games in Russia based on the Soviet invasion of Afghanistan was ill-considered, for example.) On the other hand, where a nation practices discrimination in its sports programs, I think such a boycott is justified. (Accordingly, I supported the expulsion of Rhodesia from the 1976 Summer Games.)

          1. I’m pretty sure it didn’t dismantle apartheid in Sth Africa. What I think it did though is because Springboks vs All Blacks test were BIG televised events in both countries, the protest would have shown the locals back in SA we were very sympathetic to their plight. To disrupt and cancel these highly anticipated games was heresy lol… It was all about the timing to me. You just have to revisit the RWC in the post-apartheid era, when they won against the AB’s. Mandela was in there on the podium to see how much it meant to them.
            Psss… let’s forget about the food poisoning incident for the good of progress. 🤫

    2. My guess is these things tend to be so involved that it is not possible to unravel one from another. How many grains of sand make a heap?!

      1. How many grains of sand make a heap?!

        Now you’re sampling the Hegelian quantitative difference/qualitative change dialectic. 🙂

  6. I am pretty sure lots of Universities are being strong-armed into this sort of approach to ethical investment. Broadly an approach that should be welcomed, avoiding investing in things like oil industry & anything that harms the environment. However I see the complexities of getting into areas that are not really related to your, er, “core values”…

    Of related interest, Margaret Attwood interviewed Prince Charles on radio 4 & he talked about his sustainable investment fund…
    https://www.msn.com/en-gb/news/uknews/prince-charles-describes-humanity-s-exploitation-of-nature-as-insanity/ar-BB1ck6yF

  7. Suggested principles and dogma are different things. California, some years back, instituted a policy that most of their energy must come from renewables. Most of the time, this works pretty well, however during peak demand in the summer, residents of the state are now subjected to rolling blackouts (see WSJ.com.) (These are blamed on fires and other phenomena, but I remember these happening many years ago when I used to live there.) It would simply be a matter of changing the policy to allow the use of one or two coal fired plants during peak demand and all of those rolling blackouts would be prevented. Similarly, even with nuclear power, the designs used from many years ago were adapted for ships, and are poorly suited for land use. According to an article in Bloomberg Businessweek, far more efficient designs are available which would allow for huge amounts of power production with very little carbon output, safeguards against meltdowns, and relatively little waste compared to almost all other electricity production methods (even solar and wind.) Fusion is another possibility for electricity production. But there is continuously a NIMBY mentality which is what has caused the housing shortage in San Fransisco Bay area, and people have failed to see their own sightedness on many of these things.

    Meanwhile we are developing a society were all history is being erased (which means invevitably that the worst aspects of history are doomed to repeat themselves.) In Maoist China, this is exactly what happened. The writing, language, and culture were changed to the extent that the government could basically make up their own version of history. Soon we will have slavery denialists, just like there are holocaust denialists, when all traces of it are removed and erased.

  8. I found your comments very well thought out, Greg. As you point out, SSE’s portfolio is spit in the ocean so its social investment strategy is symbolic at best. The question is whether those symbolic gestures will cost it. I think not. It should be possible to construct a balanced portfolio that can do as well as a broad index even given its symbolic posturing.

  9. The reply buttons do not appear to work anymore (and the great edit function has disappeared), but this is in response to the South Africa comments under 5.
    I think what really led to the fall of Apartheid was the fall of the Eastern Bloc. The (more or less covert) support for the South African Apartheid’s regime, mainly by the US (as leader of ‘the West’), was it’s solid and hard anti-communist stance. In November 1989 the Warsaw Pact was disbanded, three months later Mandela was released and the ANC unbanned.
    Note, mentioning that the fall of communism in Europe was probably more important than ‘the Struggle’ is a great way to make yourself popular in the New South Africa (/s).

  10. Good work Greg. Like Bob@1, I think the SSE “policies” are not effective at influencing companies because the SSE investments are too small.

    Instead this is just posturing by the SSE leadership. That’s a sad development for the society once led by our host as president.

    The last time my SSE membership came due I didn’t bother to renew it. This kind of posturing by the SSE leadership on issues that Greg highlighted (issues having nothing to do with the practice of evolutionary biology or with the behaviour or ethics of evolutionary biologists) helped me decide to leave. Plus one fewer stale pale male makes the society look more “diverse”, so there’s that too.

  11. Greg you take on many substantive issues with the principles. I would only add to your criticism one pragmatic one – that it’s going to be virtually impossible to gain agreement on how to weight and prioritize sixteen different investment principles. There’s going to be so many conflicts that this essentially just gives top cover to the societies’ officers to do whatever they want, then cherry pick one or few from the bunch to defend that decision.

    I know it’s tough in the woke era to leave any historically disadvantaged ground behind, but if they really want to create some investment principles with teeth, they should probably pick their top 2-4 ideas, phrase them in the negative (i.e. as “don’t invest in anything that does x”), and leave it at that. This would be much clearer if there are ever disputes, and it would prevent the officers from ‘gaming’ the system by using the letter of the principles to work around the spirit of them.

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