Moral Criteria for Investment

By Guest Contributor

During one of my first weeks in college, I did what every self-respecting Middlebury freshman did: I signed up for every and any club I thought I might find even remotely interesting. Although I naturally cut most of the clubs off my list, one standout was Socially Responsible Investing Club.

The club looks to invest Middlebury’s endowment in more sustainable companies — not just for idealistic reasons but because the SRI argues it is more financially stable as well as socially responsible. One subgroup of the club concerns itself with ESG criteria, that is, the Environmental, Social, and Governance criteria that would classify a company as sustainable. Since Middlebury College has recently pledged to substantially increase the part of its endowment that is invested sustainably, the dominant question at SRI meetings has become: what does it mean for a company to be sustainable and whom can we invest in? ESG criteria seek to define this question more concretely.

At Middlebury, it seems everyone wants to see our investments line up with our values. But, judging on how difficult fossil fuel divestment appears to be for the administration, it is unlikely that Middlebury, a business itself which needs to turn a profit, can pull out industry by industry according to what we deem in-line with our values. ESG criteria can be a practical tool for our investors to use as they assess future investments not only their sustainability, but also their profitability. The SRI will be conducting a survey this week to ask students which of the ESG criteria they value most highly in Middlebury’s investments so that future investments can be more in-line with community values.

The first criterion is environmental. Many people think that while being environmentally conscious is a positive, it does not actually affect a business directly. Often, however, environmentally conscious companies employ business strategies that will be more effective in a long-term perspective.

In order to understand how environmental factors affect businesses, I have used two principles we have been studying in my Intro to Macroeconomics class. The first is that to most companies pollution is an externality, and, although pollution is an inefficiency (in that it damages the environment thus spoiling resources), it may not affect the company directly so the company has no reason to factor it in to their operations. Governments, however, can internalize pollution by implementing carbon taxes, environmental regulations, and fines for excessive pollution. As governments begin to employ these tactics, environmental sustainability starts to have a direct impact on profits.

The second principle is that markets are directly affected by expectations and opinions.  With more public awareness of global warming in social media, and journalists calling out companies left and right for negative environmental impacts, businesses’ environmental performance is already directly affecting their profits. In an article written by Dinah Koehler in the Deloitte Review, she asserts that negative environmental news concerning any given company has resulted in an average of a 1.12 percent decline in stock returns over the past decade, whereas positive environmental news has resulted in an average 0.84 percent increase.

Because they are easier to quantify, environmental factors are often the main focus of ESG. However, Social and Governance issues also have profound impacts. The social element consists of equal rights employment and human rights issues. In her article, Koehler also claims that human rights issues in the form of boycotts, protests, or simply a bad public reputation “have triggered an average $892 million drop in market value.” While non-publicized social practices cannot be directly linked to profit, for Middlebury’s purposes it is still important. Middlebury markets itself as a forward-thinking, environmentally aware, international school; for it to invest without consideration of the effect its money is having on the world would be hypocritical.

Governance has also proven to be correlated with good financial results. Treating workers well with preventative safety measures and quality management can lead to better crisis control and publicity, both of which leading to more reliable profits. A more stable company is less likely to go under after a crisis, making it a safer investment.

Middlebury cannot just leave its money sitting around. It is a business, and, like any business, it must invest its endowment so that it can earn money and continue to operate. That is why ESG is such an ideal tool for Middlebury investors to use. It provides the opportunity to assess sustainable and profitable investments that are also in-line with our community values. The survey will play the critical role of letting the administration know where students stand. It can be found at the go/ESGsurvey.

EDWARD O’BRIEN ’17 is from Lincoln, M.A.

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