Before I started working at Bippit, I used to be part of a team managing the UK’s first student-run ethical investment portfolio, Prosper Social Finance. Based in Edinburgh, Prosper’s investment philosophy is centred around investing in companies that are ethical in their operations, where their product or service makes a positive impact to society.
In order for Prosper to achieve its goals, Edinburgh University allocates funds to invest for the long-term. As of July 2019, Prosper’s investment return is 17%, far outperforming US, UK and European markets. Although the amount granted is nowhere near the level of institutional investors, investing ethically on a larger scale can change the finance industry for the better. If investor money is increasingly put into companies that are ethical, this is likely to promote a more sustainable business culture. While I was part of the investment decision team at Prosper, these were the 3 key lessons I learned on how we can change the finance industry.
1) Invest in companies that invest in the future.
A large part of Warren Buffet’s investment philosophy, one of the world’s most successful yet humble investors, is to put your money in a company you can see thriving in the next ten years. Companies that only focus on the short-term are bound to be run into the ground in the long-run. As Jeff Bezos told Fortune editor Adam Lashinsky some years ago, “The three big ideas at Amazon are long-term thinking, customer obsession, and a willingness to invent.”
The renowned company builders of our era—Apple’s Steve Jobs, Salesforce’s Marc Benioff—have known such a philosophy instinctively. It’s a message reinforced by business schools and preached by the most acclaimed of investors the world over. Warren Buffett, whose investing horizon is the horizon, likes to say his preferred holding period is “forever.” A 2017 study by S&P Global found that an index of large and midsize firms that, “embody long-termism” in their strategy had consistently higher returns on equity over the previous 20 years than various quartiles of companies with more of a “next quarter” focus.
2) Invest in a business that has a diverse and transparent team behind it.
If you have a team that is committed to a transparent philosophy, this will create a platform for good governance and accountability, allowing it to thrive. Diversity is critical to this because it endorses different perspectives and feeds into a long-term vision. Tying all this together requires a dedicated, talented and diverse team.
When you research a company, the first thing that should come to mind is, who is running the show? Although this may seem obvious, such a factor is often overlooked. Company annual reports are littered with numbers and figures; meaningless information without comparing profits to competitors. Many investors (and therefore business managers) are concerned with short-term goals: quarterly earnings targets, buying back stock to pump their share prices or slashing jobs to cut costs. The statement of a CEO can tell you a lot about diversity and transparency. If it’s hard to understand, this may be a bad sign.
Case and point: the recently bankrupted construction services company, Carillion. The excerpt below is a statement from the CEO, Richard Howson in the company’s 2016 Annual Report, a year before it went into liquidation:
“Our priorities for 2017 are to accelerate the rebalancing of our business into markets and sectors where we can win high-quality contracts and achieve our objectives for margins and cash flows, to manage the positions we have in challenging markets and to begin reducing full-year average net borrowing. To accelerate the rebalancing of our business, we will become even more selective when choosing the contracts for which we bid and continue adapting to trends in our geographies and markets in order to focus on new and growing opportunities, such as those we expect in our infrastructure markets in the UK and Canada”.
This should be drenched in maple syrup, because it’s 100% waffle. In reality, he hasn’t said anything concrete at all and seems to be hiding something, dressing his words up with ‘business jargon’. I mean, what is a high-quality contract? Surely such vagueness should have been a red flag for investors. Hindsight is 20/20 though, because they managed to fool investors out of millions. Generally speaking, companies that are honest and clearly highlight the benefit of the good or service to the consumer perform better. The following is an extract from Amazon CEO, Jeff Bezos, in his opening letter to shareholders in their 2002 Annual Report.
“In many ways, Amazon.com is not a normal store. We have deep selection that is unconstrained by shelf space. We turn our inventory 19 times in a year. We personalize the store for each and every customer. We trade real estate for technology (which gets cheaper and more capable every year). We display customer reviews critical of our products. You can make a purchase with a few seconds and one click. We put used products next to new ones so you can choose. We share our prime real estate —our product detail pages— with third parties, and, if they can offer better value, we let them”.
Bezos encompasses the importance of customer satisfaction in Amazon’s company ethos, but more importantly, he is transparent. In this first paragraph, he states the value of Amazon to consumers but also willingly displays critical feedback from customers. This ethos of transparency is very likely to filter through to the rest of the company, especially at such an early stage of development. Almost 20 years on, such a philosophy has allowed Amazon, a company that started as an online bookstore run from Bezos’ garage, to become one of the most successful ecommerce companies today. When you invest in a company, you are a part owner in it. Would you want to own part of a company that is dishonest to you? Most likely not.
3) Avoid companies that have a disregard for environmental, social and governance concerns.
Looking to the future is a key part of ethical investing and this is achieved through the holy trinity of business sustainability: environmental, social, and governance (ESG) criteria. As we realise the impact of climate change on the world around us, it is only natural that companies should be gearing up their business models towards a sustainable future.
The first step of screening, is to filter out companies that are producing goods or services that are bad for society; the obvious ones being Oil & Gas, and Tobacco companies. The second filter is to ascertain if the company is not complying with environmental or social regulation. Seems simple right? Unfortunately, not all companies can be easily screened out and getting this right is both an art and a science. For example, how can you measure which companies are delivering the best human quality of life? With the rise of consumer preferences towards ethics, companies are willing to pay big sums to a marketing whiz to present themselves as an ethical company.
So if the company produces great goods or services and complies with regulation does this tell us it’s ethical? Not necessarily. The best way to identify the business’s true intentions is to look at its integrity. Have they actually reduced the carbon emissions they promised last year? How has the company improved waste reduction they set out? If they have a history of missed targets, maybe they aren’t as ethical as they lead on.