Ethical investing vs. Shareholder activism
By Charles Wanguhu
Churches are once again taking the lead in ethical investing. A short while ago I wrote about the catholic church pulling out of a fund which was found to have investments in defense, contraception and other companies contrary to the catholic faith. Consequently the Church of England has sold its £3.8 million stake in Vedanta Resources, the mining group accused of mistreating indigenous tribes in India, in protest at the London-listed company’s record on human rights. In carrying out this action the church expressed displeasure in the operations of the company and the unlikelihood of the company changing the way it runs its operations.
However one thing that sticks out in this saga is the time that it took the church to come to the decision to pull out its investment in Vedanta resources. The church had earlier claimed that it remained an investor because it was attempting to persuade Vedanta of the error of its ways.
The latter statement brings to fore the arguments against and for Ethical investments Vis a Vis Shareholder activism. One side of the argument is that by taking the action of divesting form the company the church lost its leverage against the company and ability to make a difference from within the company.
In some schools of though shareholder activism is a more effective way of changing companies operations as internal pressure(read voting rights in meetings) and directors duty to shareholders is a statutory requirement. The duty of a company to its other stakeholders is loosely defined with the exception of criminal actions.
However the flip side to the argument is that continued investment in the company increases the reputational risk of its investors. With the shareholders being intrinsically linked to the companies’ actions, the investor risks being the subject of protests against company actions and in some instances are easier targets than the companies. The reputational risk therefore is sometimes considered a greater factor when determining investments than the more idealistic shareholder activism.
The church of England has a rich history of ethical investing policy and in the case Harries v. Church Commissioners for England, [1991] Ch. 1990; [1992] 1 W.L.R. 1241 members of the church sought to ensure that commissioners handling funds of the church would not only act in financial consideration and would consider their Christian faith even if it involved a risk of financial detriment. While the case was unsuccessful in declarations sought I served to showcase an increased level of fiduciary duty of the trustees of the Church of England’s funds.
So really what is the better option?? Shareholder activism or a primary focus on Ethical investing?
