Discarding investors zero-sum mindset between ethics and returns
It’s good news that most Australian retail investors would be prepared to accept lower financial returns in exchange for ethically and responsible corporate behaviour. The better news is they don’t have to.
It’s intuitive to assume a zero-sum relationship between ethics and money, and possible to imagine examples where this might be the case. But when you consider the big picture in the modern context it’s clear that acting ethically, and being a responsible business, are generally joined at the hip.
Take, as a recent example, the latest annual Benchmark Report issued by the Responsible Investment Association of Australasia (RIAA), with data compiled by KPMG. The report finds responsible investment funds continue to outperform most mainstream Australian and international funds across one, five and ten year horizons. “The findings of our report refute any misconception that investing responsibly comes at a cost in terms of performance,” RIAA Chief Executive Simon O’Connor noted. “[It] contributes to the mounting body of evidence showing that responsible and ethical investing leads to better investment outcomes, alongside benefiting people and the planet.”
For some, however, this can still feel like wishful thinking. The allure of zero sum reasoning persists. Yet when you break it down it makes abundant sense that ethical and responsible behaviour should be associated with strong long-term investment outcomes.
Dialing down risk
First, ethical and responsible behaviour reduces risk. Investors, customers, community stakeholders, and regulators are asking increasingly sophisticated and challenging questions. Failure to manage these issues can result in reputational damage and legal exposure.
For example, companies are now under increasing pressure to identify and address human rights issues like modern slavery in their operations, supply chains, and portfolios. Those who fail to do so don’t just risk harming people, they threaten brand value and critical relationships as well as failing to comply with a growing body of human rights legislation.
Investors know this. Most understand that misalignment with community expectations can be value impairing. Companies with robust mechanisms to identify harm and remedy it swiftly are going to be increasingly attractive. Yes, these mechanisms will result in more ethical outcomes, but it’s also just prudent business practice.
Ethical behaviour indicates deft management and attracts talent
Appropriately managing this range of expectations and risks is not an easy task. Ensuring safeguards are installedand functional is complex, and requires a deft approach. This fact leads to another reason smart investors are seeking out ethical companies: it’s a useful indicator of management quality.
Investors realise that if management is capable of steering a course through the complexity of ethical challenges, chances are they’re capable of generating shareholder value as well.
These factors then compound.
An ethical company, with high-quality management, is a company much more likely to attract top shelf talent. In-demand people, especially younger people, increasingly want to feel as though their work is contributing to a higher purpose. They are interested in changing the world for the better and attuned to legacy.
Old-school philanthropy won’t cut it
What all this underscores is that acting ethically is absolutely core to the running of any business. As this survey makes clear, retail investors are not particularly impressed by stand-alone initiatives to ‘do the right thing,’ whether that’s charity or sponsorship. The old idea that ‘as long as they see me being good over here I can be bad over there’ no longer works.
Of course, there remains a role for corporate philanthropy. But it cannot function as a substitute for aligning a business’ core capacity with making a positive difference. Philanthropic efforts can and should continue, but they will deliver greater impact if tightly aligned with an organisation’s broader positive purpose.
Keeping an ear to the ground
This research also makes clear that a significant majority of retail investors are eager to be consulted more about ethical and social decisions. This actually represents an opportunity for any company looking to mature its practices.
A vital first step for any organisation wishing to avoid ethical pitfalls is to more effectively listen to those you might not have been hearing. If you make the effort to consult with your most vulnerable customers, for example, you are far more likely to spot canaries in the reputational coal mine.
Vulnerable customers have personal experiences that can be generalised, and the same logic applies to listening more intently to retail investors. These are investors that have traditionally been the easiest to ignore, as they are generally unable to book a meeting with the chair. Their opportunities to be heard have often been limited to questions from the AGM floor. But listening and consulting more broadly will open organisations to spotting hotspots of risk before they start burning out of control.