Some antinomian trends in ethical investment.

We hear much talk today of "ethical funds", a new name for an old concept. The idea that people should not have their savings invested in industries of which they do not approve is not a new idea. A century ago, when the teetotalist movement was strong -- and it was so strong in the United States that Prohibition was established there in January 1920 and lasted until December 1933 -- it would have been unthinkable for a committed teetotaller to have shares in a brewery, or a vineyard, or a chain of hotels.

This simple and perfectly understandable attitude is in contrast to those who today promote so-called ethical funds. A leading Westpac staffer, Shaun Mays, said the following at a World Bank conference on Mining and Sustainability in Washington (9 April 2001):

   "What we need is hard-headed thinking driven by the serious commercial
   proposition that environmental and social responsibility is intimately
   woven into the fabric of outstanding financial performance.

      At Westpac we have either directly surveyed or been involved in surveys
   of pension fund members which rank the environment and human rights at the
   top of the list of their concerns when it comes to investing their money."

There are two rather different messages expressed here. The first message is that financial performance correlates highly with (or is "intimately woven into") environmental and social responsibility. But the second message has a different emphasis. Investors, it is implied, are demanding performance on environmental and human rights issues (at the top of the list), ahead of financial returns, the implication being that there is a tension between the two.

If the first argument is soundly based, then surely there are no grounds for having special funds which are available, as debt or equity, for companies which meet the criteria which the ethical funds require. If the financial performance of these companies is indeed superior, then they will grow and prosper, and the companies which do not measure up will, through inferior economic performance, either transform themselves, or decline and eventually vanish.

The second argument is more important than, and contradicts, the first. It is somewhat like the attitude of the teetotallers a century ago. Regardless of how profitable or efficient, or benevolent to its employees, a brewery or distillery might be, the teetotallers would not invest in it. "We will not", they said, "invest in it because we abhor your product."

The story of Prohibition in the United States indicates that the brewers, the distillers and the vignerons were not disadvantaged through lack of access to capital. They were put out of business because the Prohibitionist movement was politically astute, well mobilised and run by individuals passionate in their cause. They were able to set the brewers against the distillers and the vignerons; the vignerons against the distillers and the brewers; and the distillers against the vignerons and the brewers. Having given separate and soothing assurances to the three different sectors, the Prohibitionists, when the opportunity finally came, shut down all of them.

If someone believes that alcohol is socially and personally destructive, and decides as a private person that he will not personally invest in companies involved in producing or distributing alcoholic beverages, then that is his right. On the other hand, Prohibition, the imposition of a political doctrine which sought to use the authority of the State to change human nature, left behind a legacy of corruption and crime which persisted for many decades, and which indeed still lingers in America. So when a private decision about alcohol is transformed into a political movement, the game changes dramatically. The Prohibitionists became antinomian in their behaviour, to the point where (to quote Andrew Sinclair, the eminent historian of the period): (1)

   "[A]fter Prohibition was law, they approved the legal poisoning of
   industrial alcohol, knowing full well that men would die from drinking it.
   Excess had this way of turning things into their opposites: an amenity
   became a crime; the imposition of controls led to a loss of control; the
   churches created gangsters; reformers became reactionaries; purifiers
   became poisoners."

This is where the so-called ethical funds are in danger of heading. A fund manager has a perfect right to decide that he will not invest in companies engaged in nuclear energy or uranium mining. Likewise the manager of a fund which explicitly does not invest in, say, the tobacco industry, or in anything connected to alcoholic beverages. But as soon as the word "ethical" appears, we have a problem. Ethics in this situation can very quickly become nothing more than a currently fashionable idea in the mind of the person who is constructing some sort of index, which will lead, and is intended to lead, to a league ladder of "ethical performance".

The word "antinomian", which appears in this piece's title and a few paragraphs back, is not in common use; yet it is a word which is very helpful in this debate, and deserves to become more popular. The Oxford English Dictionary defines "antinomian" as "one who maintains that the moral law is not binding upon Christians under `the law of grace'." To put it another way, an antinomian is one who is so convinced that he or she is close to God, or to some higher vision, that the ordinary conventions of civilised behaviour simply do not apply to him. The S11 demonstrators who violently besieged the World Economic Forum meeting in Melbourne last year were cast in the classic antinomian mould.

Now there is, of course, a very large distance between the S11 demonstrators and the people who seek to compile ethical indices. But the problems they face are of the same kind. How can one justify a decision to mark down wood-chippers, defence equipment suppliers, or uranium producers, as being much less ethical individuals than, say, telecommunications suppliers or money-lenders, other than through invoking a special relationship to God or access to some higher wisdom unknown to other men? These indices are supposed to be objective, in some way free of bias or prejudice. But as soon as one steps outside the boundaries set down by the Ten Commandments, definitions of what is ethical, and what is not, inevitably become highly subjective; and the temptation to rely upon the fashionable prejudices of the day becomes overwhelming.

Last year a book entitled "Ethical Investment", edited by Ross Knowles, was reissued with the imprimatur of Westpac Investment Management. It contains a forward written by Mara Bun, Policy and Public Affairs Manager of the Australian Consumers' Association, and in this foreword we find the following:

"The rise in `stakeholder capitalism' in which social and environmental stakes can be factored into market decisions is apparent everywhere. Some key stakeholder concerns that must eventually be factored into the global financial equation are:

* environmental degradation 

* human rights

* children's rights and working conditions

* rights of indigenous people animal rights

* women's rights."

Of the six issues listed here it is the issue of "animal rights" which takes us into the recent history of the attack, by animal rights campaigners, on the Huntingdon Life Sciences company in Britain. There has been very little coverage of this matter in the Australian press. But the Huntingdon affair raises major concerns for the financial services industry, and for those who work in the capital markets of the world's major cities. It also bears upon the issue of ethical investments, since it will become apparent that in the attack on Huntingdon, we see antinomianism in its most frightening form. This story has been described in a report from "The Spectator" (26 June 2001), by Peter Oborne.

Huntingdon is a drug-testing company, one of the foremost in its field. It plays a vital role in the British pharmaceuticals industry. Without Huntingdon and companies like it, proving that new pharmaceutical products did not have terrible side-effects would be impossible. But animal-rights activists decided to make an example of the company. An activist secured a job as a technician in the Huntingdon laboratories five years ago. She smuggled in a secret camera, and after hundred of hours of clandestine filming, managed to get pictures of Huntingdon employees hitting a beagle. That incident led to the resignation of the senior management of the company and the installation of a new management team. The new managing director, Brian Cass, was set upon by three men wearing balaclava helmets and wielding pickaxe handles. His marketing director was attacked in front of his family, his face sprayed with ammonia. However, both men were back at work the next day.

The campaign against Huntingdon then moved from the company itself to the City of London. The organisation driving the campaign against Huntingdon, namely "Stop Huntingdon Animal Cruelty", has always denied any involvement with violence or intimidation. But Merrill Lynch, H.S.B.C. Holdings, West L.B. Panmure, T. D. Waterhouse Group and C.S. First Boston have all cut financial links to the company. Dresdner Kleinwort Wasserstein and Winterflood Securities said they would no longer buy Huntingdon's shares, because of threats and intimidation against their staff. The Charles Schwab Corporation has stopped clients trading in Huntingdon stock. One of the directors involved in these decisions said to Peter Oborne:

   "It's hard for me to talk. I'm not prepared to go on the record and bring
   all this s .. t down on wives, families, the lot."

Huntingdon was saved from bankruptcy by a U.S. investor, and the Bank of New York is the only firm now ready to hold Huntingdon shares for investors.

This is a frightening story of antinomian violence, directed against not just the men who work for Huntingdon, but their families, and the families of men and women who work in the financial sector and whose companies have been involved with Huntingdon. From all of this, the conclusion which needs to be drawn is the necessity for vigilance against antinomian behaviour at every level.

The first step down the antinomian road is carelessness with the truth and a lack of complete candour about how "ethical indices" are created.

One of the questionnaires that we at Western Mining Corporation received in April 2000, from the Zurich-based S.A.M. Sustainability Group which gathers data for the Dow Jones Sustainability Group Index, asked the following question: "Does your company produce copper?" To which we answered "Yes". This was followed by: "If yes, please state the amount of copper sold to weapons manufacturers and the military."

After we had contacted S.A.M. and pointed out, politely, that its question indicated a profound ignorance about world metal markets, S.A.M. did take that question out of its survey in the following year. Still, the Index itself carries some weight, and to find such a question in such a place at all does shake one's confidence in the knowledge base of those people who take it upon themselves to ply companies with ill-informed surveys.

Those who preach ethics must demonstrate what they mean by ethical behaviour, and to the extent that they mean something more than the Ten Commandments, they need to show such a commitment in their own corporate lives. The evidence indicates that the only way forward for funds managers who wish to offer "ethical funds" to their clients is to behave with complete transparency and candour. Compiling indices of "ethical" behaviour based on inevitably subjective judgments about uranium mining, carbon dioxide emissions, supplying defence equipment, supplying metals which can be used to make defence equipment, or animal testing of new drugs (to choose some examples) will inevitably result in arguments which can never reach a conclusion, and which will certainly create resentment.

Nothing good can come of interposing an ethical intermediary between the investor and the funds manager. The investor has to assume responsibility for making moral judgments. If his decision leads to a lesser financial return than would otherwise accrue, then so be it. The funds managers can fulfil their role by ensuring that the options which the investor has demanded are complied with.

It seems clear that decisions about investing people's savings will be made increasingly by funds managers, and the proportion of total savings for which they will have responsibility will continue to grow. Funds management is a very competitive business, and will become increasingly so. The number of organisations which now offer advice to governments and to funds managers on ethical investment, and despatch questionnaires to companies like Western Mining Corporation seeking our cooperation in their activities, is now increasing rapidly. The time has come to have a wide-ranging debate on the questions raised above.

(1.) Andrew Sinclair, "Prohibition: The Era of Excess" (Faber & Faber, London, 1962).

MR. HUGH MORGAN, A.O. is the Chief Executive Officer of Western Mining Corporation, a Director of the Reserve Bank of Australia and President of the Australia-Japan Business Cooperation Committee, and takes a prominent part in public affairs in Australia.