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Wednesday, December 1, 2021

The big contradiction at the heart of Meghan and Harry’s new ‘ethical’ cause

Prince Harry and Meghan, the Duchess of Sussex, recently announced that they joined Ethic, an asset manager that markets itself as “ethical.” The famous couple’s stated purpose is to encourage younger people to invest “sustainably” — a worthy goal. Yet ethical investing is too often a smokescreen for asset management that lets large companies get away with polluting, discriminating and paying bare-bones wages when they can. So this announcement is an important opportunity to talk about what ethical investing means right now — and how it can be improved.

This announcement is an important opportunity to talk about what ethical investing means right now — and how it can be improved.

The vast holdings of asset managers — from big players like BlackRock and Vanguard to smaller entities like Ethic — give them unparalleled power over the allocation of resources in our economy. By law, their “fiduciary duties” (the responsibilities that companies have to those whose assets they manage) prioritize profits over the preservation of critical social and environmental systems. This is the inherent tension with ethical investing of all kinds.

The way that these duties are currently defined means asset managers focus on increasing financial returns as quickly as possible. Ethic says that it enables investing according to your “values,” but even they cannot prioritize investments that have worse financials. They can enable comparisons of better-or-worse impacts on society for companies with the same financials (which they say in this cheeky video).

This system is thus antithetical to the needs of the very households whose savings are being managed, to say nothing of greater society. Such misalignment creates unrelenting pressure on environmental systems, social institutions and the political process. Even companies that do want to find a way to make money ethically are being squeezed by misguided fiduciary standards. It is notable that just Thursday, the Department of Labor released a proposal that would enable asset managers to consider sustainability, though this would only apply to funds that the DOL governs.

Asset managers are supposed to be responsible for the actual interests of the households and pension funds who they serve. The issue today is how we define our “interests” — and in the 21st century, they should no longer be defined solely as financial returns. All people have a stake in whether we decarbonize our economy, raise job standards and live in a healthy and more equitable society, including those people who use asset managers.

At the same time, U.S. households who own financial assets — such as stocks and bonds that they hold in a retirement fund or a 529 college account — have largely become fully diversified shareholders of corporate equity, meaning that their wealth is bound up in the entire stock market, not just a small subset of companies. (The wealthiest shareholders often take a more targeted approach via a somewhat complex system that allows some people to buy shares not traded on the stock market.) This means we bear all the effects of corporate “negative externalities” — an economic term that refers to when a company finds a way to avoid paying for problems it created. Think, an oil or chemical manufacturer that pollutes the environment and does not have to pay for it. The climate crisis necessitates new rules to ensure that all asset managers are required to invest with the long-term interests of beneficiaries in mind, not just the short-term payoff.

In a recent paper with Rick Alexander of The Shareholder Commons, we propose two specific areas for federal policy reform. The first is a substantive redefinition of asset manager fiduciary duty, so that managers must consider the impacts of their portfolio on their beneficiaries’ common interests, including on the welfare of communities and the environment. The second is a substantive bright line that requires portfolios be carbon neutral by 2050 at the latest, in compliance with the Paris Agreement. Policymakers should revise the Investment Advisers Act of 1940 and ERISA such that all asset managers are “responsible for the impact they have on the shared social and natural systems needed for a just, equitable, inclusive, and prosperous economic system.”

One might think that “sustainable investing” would solve this problem, and indeed there’s trillions flowing into “sustainable” portfolios.

One might think that “sustainable investing” would solve this problem, and indeed there’s trillions flowing into “sustainable” portfolios, perhaps on that assumption. But as the former chief investment officer at BlackRock put it, “[the] industry knows if they put ‘ESG’ or ‘green’ on something, they can make a lot more money out of it,” even though there is no agreed-upon definition of what a “sustainable” investment actually is.

In other words, what qualifies a fund as “green” or “ethical” has no agreed-upon limits; this is why, for example, even in a “Fossil Fuel Reserves Free” fund, some percentage of the stock held could be from coal, oil and gas companies. Even when a fund holds only stock from companies in certain sectors, it is likely that their fund family is holding stocks of, say, fossil fuel companies or military-industrial complex companies in another fund.

The Duke and Duchess of Sussex say they want to raise awareness around issues such as social justice, climate change, and income inequality. That is, of course, a good way to use their massive platform, but they should also use their position to call for real reforms that would make all asset managers actually responsible to the people and societies whose assets they manage. And they should recognize that new startup companies that make different decisions are not enough — we need sweeping changes so that all businesses do not continue to excuse destruction of the environment and the squeezing of workers as just the cost of doing business, with asset managers justifying those behaviors as the cost of increasing financial returns.

Lenore Palladino

Lenore Palladino is assistant professor in the School of Public Policy and the Department of Economics and a research associate at the UMass Amherst Political Economy Research Institute. She is also a fellow at the Roosevelt Institute, and a contributing editor at the Boston Review.

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