07 May, 2018
category: Trade & Policy
Author: James Eagle
Sasha and Cedrique had pulled it off. It was breathtakingly brilliant. They had set up a stand at one of the best known organic food conventions in Europe. The trouble was that they didn’t own a restaurant or a genuine business, which was sort of a prerequisite. They didn’t even have a menu of organically sourced food to show to people.
But that didn’t stop them.
Hours earlier, the pair strolled into a local McDonald’s and splashed out on some of the delights from McDonald’s ‘Saver Menu’. Using some cutlery and cocktail sticks, they carefully removed their ‘supersized’ meals from their recyclable packaging and transformed them into a delightful selection of canapés.
They then took then novo-chic cuisine and marketed it at their stand as their new organic range.
Somehow these two unassuming young Dutch gentleman proceeded to fool some of the biggest food experts in the Benelux region. One gentleman who was sinfully indulging in a calorific Fillet-O-Fish was whisked away to a higher plane:
“Tastes like fish, reminds me of cod. Rolls around the tongue nicely, if it were wine, I’d say it’s fine”.
The duo took it to the next level, asking visitors how their ‘organic’ treats compared to McDonald’s.
A young woman replied, “It definitely tastes a lot better and the fact that its organic is a good thing”.
Another passer-by added, “This absolutely has a lot more taste to it than McDonald’s”.
Meanwhile, a lady from a rival stall – one of the experts – decided to weigh in: “It’s definitely a lot tastier than McDonald’s. You can just tell it is a lot more pure”.
I would recommend watching the YouTube video.
To play this video, view this post from your live site.
We often accept the stories we are told with blind faith like the people at this food convention. It’s unfortunately the same when it comes to investing.
When a company tells us that they do all-things-green-and-ethical, they often do it because it ticks all the right boxes for those looking for a sustainable return.
Yet dare I say it, “It’s just marketing”.
Unfortunately, there are many companies that operate in opposite direction to the cause they champion through their marketing campaigns.
Here’s a great example.
On “Earth Day” in 1999, Sir John Browne – the head of BP – received an award for environmental leadership at the UN building in New York City. He had already been knighted by the Queen for his efforts and praised by business leaders globally. Under his stewardship, BP’s share price broke new highs.
At the time, BP was the second largest oil company in the world, and the largest supplier of oil and gas to the United States. This award defied convention. Environmentalist traditionally vilified the oil and gas industry. So why the change in heart?
It started a year earlier when BP endorsed the famous Kyoto Protocol on emission targets. If you remember, this was the one where the US – the world’s biggest polluter at the time – refused to sign. BP pulled out of the oil-led climate collation, which lobbied hard against Kyoto. It re-branded itself from “British Petroleum” to “Beyond Petroleum” – a fantastic piece of marketing.
But it didn’t last.
On 20 April 2010, the BP-operated Deepwater Horizon oil rig exploded and sank, killing eleven workers. For 87 days, 210 million gallons of crude oil gushed out into the Gulf of Mexico from its seafloor. It was the worst environmental disaster in US history, killing wildlife, damaging marine ecosystems and destroying local fishing industries.
It wasn’t just an accident. Apart from the appalling environmental fallout, it could have been avoided. In the US, the national oil spill commission set up by the White House identified a series of safety failures and disastrous cost-cutting decisions made by BP.
This wasn’t a one-off event.
BP had been embroiled in numerous environmental disputes prior to this disaster, such as the environmental damage cause in the fragile oil-rich Arctic.
BP did meet its Kyoto Protocol target, but it was quite easy to do. For years it had run programmes, such as solar-powered petrol stations, school programmes and urban air initiatives that were cheap to implement and great for the company’s green image.
It’s a classic case of what we call in the investment industry, “green washing”.
However, BP is by no means an isolate example. I chose it because I had bought the story and I had been invested in this company. It was a favourite among UK pension schemes because it was a great dividend payer back then.
Unfortunately “green washing” also occurs in the asset management industry. Many firms claim to adhere to social responsible investing (SRI) or consider good environmental, social and governance (ESG) when making investment decisions.
I’m not a fan of three-letter-acronyms, so let’s drop the TLAs and call it ethical investing.
In every industry there are the good, the bad and the ugly. The bad and the ugly do little more than apply an index filter on an existing investment strategy. They see ethical investing as nothing more than a necessary requirement to tick the boxes that prospective investors require.
Yet there are good portfolio managers that are prepared to get their hands dirty. They actively avoid companies at risk from unethical practices by carrying out full-on due diligence and gaining an intimate understanding of the companies they invest in. This analysis goes far beyond what’s looked at in corporate financial statements. They do a thorough investigation, which is priced into their valuation models.
I am not a tree-hugger, nor an evangelical environmentalist. I just don’t want to be exposed to unnecessary risk and that’s why I’m prepared to pay an active manager who genuinely cares, to do that for me.
Reckless companies are not good investments in the long-run. No one wants a negative surprise to wipe out their portfolio’s performance. I think struggling to invest ethically is, therefore, worth it.
But always check things carefully.
I ate a zero-fat raspberry yogurt the other day, only to realise afterwards that it had more sugar than a can of coke.
Don’t accept ethical investments at face value! Challenge it!