investing in shares

Words not enough when investing in shares

If Big Tobacco is regarded as acceptably "ethical", is this reason enough to never just rely on the words of companies when investing in shares?

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Studies show that most women like to do their homework before investing in shares but how much weight should we give to the words of companies and ratings agencies?

We regularly rely on a person’s word and we rely on the promises, by way of words, of companies that provide us products and services.

Sometimes those words can become loaded, be overused to the point of being called a ‘buzz word’ and others can actually mean a variety of things, subject to varied interpretation.

Perhaps this is where we are at with words such as responsible investment, sustainability, environment, social, governance (ESG) and ethical – all words now commonly used in the share market investment context.

But can words be relied upon by analysts, directors and importantly investors?

If one were to invest in a socially responsible or sustainable investment option, they would rightly believe that the companies of which they were to become owners were in fact sustainable and sought a balance between financial return and social good. If they chose an ethical fund they may expect even more.

But how then does the finance sector explain the inclusion of Big Tobacco in the US Dow Jones Sustainability Index?

In fact, Big Tobacco promote their inclusion in the index on their website stating that they are an industry leader for the 12th year running, providing a positive promotional opportunity of which they are now severely restricted.

It is not uncommon to find tobacco companies, which produce cigarettes that are responsible for the deaths of two out of three smokers, in responsible investment (RI) and socially responsible investment (SRI) options provided by mainstream financial institutions, says the medical journal BMC Medicine.

The reason these stocks are included is due to the ‘best of sector’ approach adopted by ratings agencies and others in the investment community. ‘Best of sector’ means that no company is excluded and companies are only judged against their peers.

Therefore at least one tobacco company will get a top AAA rating or three green stars for environment even though anti-cigarette campaigns like Tobacco-Free Kids say cigarette butts are the number one littered item worldwide, fouling waterways, toxic to the environment and non-biodegradable.

That big tobacco could get a AAA for ‘social’ seems astounding when the world is on track for one-billion deaths this century from tobacco-related illness according to a report by the World Health Organisation.

Microsoft Cco-founder Bill Gates and founder of media and data company Bloomberg, Michael Bloomberg have set up a fund to help poorer nations defend anti-smoking laws designed to protect their people.

This reality should lead us to question not just the data but also the words that we attach to it.

Words can only live up to their meaning when our actions match. Whilst the finance sector is undoubtedly focused on the numbers, a careful look at the bourgeoning area of responsible and ethical investment highlights that words matter too.

Interest in responsible and ethical investment is undoubtedly a good development for both the finance sector and our community more broadly. Perhaps the worst thing that could happen to this movement is that investors are misled and lose trust in the system.

A critical look at the data, the methods of analysis and the promises, explicit and implied, should be the first step in ensuring we can in fact rely on the words that many of us find so attractive when it comes to our investments and the way we want to live.

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