Investing in stock to promote sustainability? It does not look good.

3 November 2017

 

 

What to do with my savings?

It’s a longer story obviously, but I am approaching my 50th year and recently ran into my first permanent job. It pays okay and I try to keep my footprint limited so I ended up saving money. This money sits in a bank account.

Call me crazy or paranoid or anti-capitalist, but the past decade or so made me thoroughly distrust banks. They want all my money and when I lend it to them they charge me for that. Then they lend my money to others and charge them too. Worse, I have to use their ‘services’ because of how Swedish and Dutch and many other societies are organized. The cherry on the cake: when in spite of their business model they go bankrupt, there is a pretty good chance that they get saved by the societies that serve them.

But all this pales compared to the worse part. I do not know what they support with the money that I lend them, whereas I would like to make my money count in ways that I approve of and can choose myself. Just like the groceries that I buy in the supermarket and the clothes that I wear. Because I do believe that my choices make a difference.

And no, I would not mind if after I made such choices, I earn money with that. At least not for the time being.

So, I started wondering about this thing called investing and the remainder of this page will tell you about my findings. First, to get you in the right direction, a short summary of what the basic options are and what the two beginners’ introductions that I read told me. Next, I found out that what I am looking for seems not to exist. I had to make my own ‘index’ based on four relatively simple criteria. Then I found out that this index tells a disappointing story about investing in ‘sustainable’ stock.

The basic investment options

If you know about investing, you can skip this section. If you don’t know about investing, then this section prepares the ground for the next. To shorten this page, continue reading here.

Sustainable investment funds and their flaws

If you’ve read the previous section or if you already aware of them, you’ll know that there are sustainable or ethical funds and indexes around which seem an easy enough answer to my question, how to promote sustainability through my savings. However, some digging into these showed some problems, which I discuss here.

In the end, I feel that I have to select the companies to invest in myself.

Four imperfect but simple and easy-to-test criteria

Requirements for the criteria

As far as I understand, in the context of investments, an ‘index’ is a list of companies that are included based on some decision scheme or metric. Obviously, these can be very simple or complicated, crude and/or subtle. The question then is which set of criteria is good enough? Or put differently, what can we require of the sustainability criteria? Measurability is an obivous requirement, but here are a few more that came up in the text so far.

  1. One could be, simplicity. As the authors of the two books that I mentioned, if you do not understand the investment instrument, then do not use it. It makes sense to apply this also to the index. Simpler instruments are easier to understand than complex ones, so let us opt for simplicity. But remember that even simple ones can be deceivingly difficult to understand. An additional reason to use the simplicity requirement is that since sustainability can mean so many things and the world is such a complex place, it will be a never-ending exercise to try to capture it all. Finally, we should be in a hurry, because I feel the world is not improving fast enough.
  2. The other requirement is openness. It precedes simplicity in a way, because in order to assess if something is simple, you need to know how it works.  I complained that I could not find documentation on existing sustainability indexes, so I should do better than that myself. Just continue reading.
  3. Democratic. What? Yes, democratic is a requirement. I.e. the index should be open for discussion. Here is why. Since the world is so complex and we can not really fully understand how an index like this will work out in the long run and when it is practiced on a planetary scale, the design should be subject of opinion. Below, I will propose four criteria. I have selected them, which is a choice, and one of the four measures my opinion: it measures my assessment about whether a company’s activity is promoting a better planet or not. You would probably make different choices.

That is it. Perhaps there are more requirements to consider, but I can not think of any right now. Again, please do let me know if you have suggestions. Now, let’s get to the sustainability criteria.

What, how and how long?

Chewing over the previous chapter, it seems I can systematize things a bit. I found two dimensions that I feel matter: One is what does the company do to earn its money? The other is how does it try to achieve that goal? Then both dimensions can be divided in the humanitarian aspect and the environmental aspect.

The third dimension, in practice is not really a dimension because I ran into no companies that earn their money by improving human rights situations. It makes me furious but it seems there is no viable business model for it. … well, now that I think about it and sidestepping a bit, I should add: at least not for legitimate, publicly listed companies. Until recently (September 2017) some organizations have been making money by trying to get refugees across the mediterranean to Europe. They are criminal gangs and I don’t approve of how they do this, but what they do serves a humanitarian cause. Anyways, the third dimension is not entirely covered.

What?

On the ‘what’ dimension things are complex, yet can be simplified. Companies can be engaged in many things, so it is hard to come up with a checklist of issues as can be done on the ‘how’ dimension. The one remaining question that we can ask is: Are the company’s main activities either detrimental to, neutral or positively improving the planet or humanity? This leads to my criterion 1

Criterion 1
The company’s activities actively promote a more sustainable world.

This is the criterion that measures my opinion, although there is a good chance that most of this is not that controversial. It turns out that at least in my experiment, the diversity of activities of companies listed in the four Scandinavian countries that I checked is not that high. Say two-thirds [check this] are in fossil fuels and support activities, energy, mining, financial services (banking, insurance) and investment (including property development), food and beverage production and pharmaceuticals.

Looking at this list, one can think of some easy to identify contenders: energy companies that work exclusively (or mainly?) with sustainable energy sources like wind power, solar energy and biomass; companies that develop such technologies or invent new ones; food and beverage companies that invest in organic and fair trade materials and products. The list also has some easy to identify non-contenders: oil and natural gas companies and the shipping and technology firms that have them as their main clients; anything close to defense or nuclear energy (CO2 emissions are low except when we include the mining of the ore, and the radiation problem is stupefying); banking, investment firms (with the exception of one or two they are too focused on money and far too little on anything sustainable)

How?

On the ‘how’ dimension go issues like: what is the environmental quality of the raw materials or half-products that the company uses? What are the differences in the treatment of female and male employees? How energy-efficient are the production methods? How much is it paying its employees and how is their health care taken care of? How much toxic or otherwise harmful waste does the company generate? For these and many other issues one can ask how well is the company doing? Is it worsening the situation, or improving it, or somewhere in between?

Here, as with the ‘what’ criterion, the list of topics is long but here, unfortunately, I see no circumstances that naturally make the job easier. One way to go about is to take the United Nation’s 17 sustainability goals and generate a criterion for each one of them. Frankly, that would be too much work for me right now, so let me choose just one. Gender equality seems particularly suitable because no matter which part of the world one looks at gender equality can use a boost. And in particular in the management of companies, women are still horribly under represented. So, here is the next criterion.

Criterion 2
At least half of the company’s board of directors should be women.

Obviously, this is a simple and easy to measure criterion. Companies listed on the stock exchange publish annual reports that include the list of board members.

The 17 sustainability goals do not address one of the basic human rights as declared by the same United Nations, which is that everyone has the right to their life. Put differently, I am a strong proponent of the abolishment of the death penalty. From a cynical point of view this is perhaps not very sustainable considering the amount of resources that a human life uses nowadays in some parts of the world. Still, I would like to include it.

I prefer that companies that I invest in have nothing to do with countries that still practice the death penalty, but that would be too difficult to measure. For example, even if a company does not sell products to those countries, how does one make sure their products do not eventually end up there. So, I opted for the following criterion.

Criterion 3
The company has no operations in countries having and executing the death penalty.

Notice that if a country has the death penalty in its penal code, but has not actually executed the death penalty, then the criterion allows a company to have activities in that country. Notice also that the criterion is not water-tight because companies may purchase stuff from or outsource work to companies in countries with the death penalty.

This criterion is relatively easy to measure because Amnesty International meticulously keeps track of abolishment practices. Companies do not always fully report in which countries they have activities, but the companies that I checked provided sufficient information to come to a conclusion.

How long?

Like many other things, companies change in the course of time and they can be opportunistic. I am planning to invest in them for ten to twenty years, or perhaps even more. So, I want some indication that if the company complies to my criteria now, it will continue to do so in the long run. The best indication for that seems to be to look at past behaviour. This leads me to the fourth criterion.

Criterion 4
The company must have been complying to the first three criteria for 10 years

If the company has been in existence for less than that then the limit is at least 5 years. If the company is even younger, then it does not comply on the grounds that it may still change its course significantly. It is not likely to happen because my tour around some stock markets showed that there are few very young companies listed on the regulated stock market.

 

The ‘experiment’ and the results

The Experiment

The experiment started with a manual check of all the companies listed on the Stockholm stock exchange’s regulated market, which is called Nasdaq Stockholm. I choose this market because I live in Sweden and would not need to exchange currency to buy shares there.

The list provides the companies’ websites, which I browsed to find a concise summary of the companies’ respective activities. I rated each company -1, 0 or 1 for criterion 1. After having checked all companies, I checked the ones with rating 1 for criterion 2. Next, I checked the remaining ones for the third criterion and finally I checked the remaining ones for the 10 year consistency.

Only two companies out of about 300 passed all four criteria, which is not enough to construct a diversified portfolio. Because of this, I next checked the Oslo stock exchange because I had heard that Norwegian companies were required to have an equal representation of women and men in their respective boards. This did not yield many more companies since most of the Oslo-listed companies are in or related to oil and gas extraction or banking, so they did not score a 1 for criterion 1. Then I checked the Finnish and the Danish markets as well.

The results

The results are shown in the table below.

Exchange

Number of companies listed

Number of companies …

Passing Criterion 1

Passing also Criterion 2

Passing also Criterion 3

Nasdaq Copenhagen

134

4

0

0

Nasdaq Helsinki

125

15

2

0

Nasdaq Stockholm

300

12

0

0

Oslo Børs

183

6

0

0

Total Result

742

37

3

0

Note: companies that are listed more than once (because they offer different kinds of stock or are listed on more than one exchange) are counted only once. In total 73 listed shares are omitted (47 from the Stockholm market, 6 from the Oslo market, 7 from Copenhagen and 13 from Helsinki).

I found no companies that, following my criteria, did something good to the world and did it in a good way. This was an important finding but utterly disappointing. To me, since I feel that climate change and the environment are the most urgent topics to address, I did not want to relax the first criterion. Also, 41 companies passed it, which should be enough to produce the necessary diversity in investments. Furthermore, I am a conscientious objector to military service, which should indicate that I am an idealist when it comes to not killing people, so Criterion 3 is not up for debate. That leaves number 2, unfortunately so for all the women in the world.

The boards of the companies that passed the first criterion, range in size from three to ten, with most having between 5 and 10 members. Because of the low numbers, a difference of one in the gender accounts would make a large difference in percentage. So what happens if we demand at least 30% women for boards of up to 6 people, and at least 35% for boards bigger than 6 people? 35% will allow 3 women out of 7 members or 3 out of 8, but not 3 out of 9. The result for Criterion 2.1 is in the table below

Exchange

Number of companies listed

Number of companies …

Passing criterion 1

Passing also Criterion 2.1

Passing also Criterion 3

Nasdaq Copenhagen

134

4

0

0

Nasdaq Helsinki

125

15

5

1

Nasdaq Stockholm

300

12

7

4

Oslo Børs

183

6

5

1

Total Result

742

37

17

6

The 6 compnies that passed the first three criteria are Lassila & Tikanoja Oyj (Finland, waste collection and recycling), Axfood and Midsona (both are Swedish food companies developing organic food supply), BillerudKorsnäs (Sweden, paper packaging), Nobina (Sweden, public road transport) and NCR Group (Norway, public rail infrastructure)

Of these six, Axfood conformed to criterion four. Most of the other five companies failed to comply to criterion 2.1 in the past 10 years. In fact most failed to comply in the past four years – or less! NRC Group dropped out because prior to 2015, the company worked in imaging of the earth surface and thus did not comply to the first criterion in those years. (The company also did not survive the criterion 2.1 over 10 years) Midsona also did not comply to criterion 1, as I will discuss next.

Frankly speaking, I had concerns about the two food companies when it comes to criterion one over the past 10 years. As far as their annual reports report, neither of the two was particularly interested in organic food until 2007. In that year, Axfood reports an increasing consumer interst in organic products, which it keeps noticing in the following years. Because of this trend, it also starts developing targets to increase the share of its sales of organic products. The history of Nobina shows something similar except that it starts developing its activities much later. It enters the organic food market only in 2014 by buying companies that had already been active in that market. 2014 is the year that consumer interests increased ‘dramatically’ compared to previous years when growth was slower.
My concern regarding criterion one is that these companies did not develop their activities in organic food because they felt they needed to help the planet, but because of changing consumer interests. In other words, it was not them but the Swedish people who took the initiative. I guess that these companies deserve at least the benefit of the doubt here because at this point I can hardly argue that the other companies did not do the same: i.e. see a market opportunity. I wish however, that companies also create consumer demand by leading the way.

Possibly, I also gave Axfood the benefit of the doubt because it was the last one in the race and it would be too disappointing and sad to have to conclude that out of 800 plus companies, not even one survived these simple criteria, not even after relaxing criterion 2. When it comes to gender balance in its board, Axfood has done consistently well over the past 10 years. Until and including 2015, it 50% to 60% of its board members were women. In 2016 and 2017 did it have less than 50% women in its board but the board did have a chair woman whereas before that it had a chair man.

Conclusions. Towards a personalized index

This article started out with the question ‘what to do with my savings?’. Following two introductory books about investment for lay people, I focused on investment funds and found out that to my taste even the company selection of the ‘sustainable’ or ‘ethical’ funds is not good enough because it amounts to too little too late. I also discovered that the sustainability indexes are not well documented so I would not know what I support if I blindly follow those. Finally, I came up with a test index: a set of four criteria that are simple, open and subjective. Then I ran a test.

The results of that test do not look good for sustainable investing in stock. After compromising on the gender criterion, exactly one company out of almost 750 could be included in my test index. For those pointing out that these were only four countries: these four countries usually rank very high on country indexes for sustainability(*). So, if we find so few sustainable companies on the stock market in those countries, then how can we expect many more elsewhere?

At this point, there are a few possible answers to my question about what to do with my savings.

1) First of all, stop considering investing in shares or bonds if you want to do some good. If it is that hard to find suitable candidates and considering that I still haven’t taken the obvious financial considerations (is the company profitable, etcetera) into account, it seems a dead-end road.

Perhaps the sheer nature of the stock market is hard to reconcile with companies that put the planet and humanity first. After all going to the open stock market to acquire capital means that a company has to comply to wishes of investors that they do not know and who may only be interested in the financial bottom line. Indeed, I ran into a couple of companies that I thought were complying well to my first criterion but it turns out that they were not listed.

On the other hand, if we want to save the planet and humanity, things need to happen on a massive scale, simply because there are so many of us. This is very likely to mean that companies that are trying have to work on a big scale, which is likely to require large investments. Sustainable energy and transport are clear examples here. Just one windmill or solar collector is not going to suffice. Perhaps there are other ways for companies to grow into large-scale enterprises, but perhaps not.

2) If we insist however in investing in stock and bonds, then one option is to simply continue the search. Indeed, chances of finding more companies that comply to my criteria are slim. But they are not zero. Scandinavian countries score high on development indexes but they are also small in population size. There still are many more stock markets to explore.

3) Another answer to my question could be to be less picky, depending on what I ultimately find more pressing. Let’s suppose I drop the humanitarian criteria (i.e. number 2 and 3) then suddenly the range of candidates increases from 6 to 37 before testing for the 10-year criterion. There it is likely that many of the 37 will pass, since companies on the regulated stock market tend to be old and constant enough for that. Alternatively, I could drop the fourth criterion. Requiring companies to have shown wished-for behaviour over the past ten years does not encourage the ones who don’t comply at all to change. I would reward them for that only after ten years. So, perhaps ten years is too long. Or perhaps I should invest at least part of my savings into companies that have recently complied to the first three criteria.

Being less picky certainly open up possibilities, but there is a risk that it also leads to changes that are too slow or to too small. I guess it is a matter of operational research into what works best.

4) Instead of loosening the criteria, another possibility is to try a different set of criteria. This brings up the issue of subjectivity and democracy. As I pointed out earlier, the four criteria are my choice for this experiment. I feel they address sustainability issues but not all. Also, one of them measures my evaluation of whether a company is actively trying to improve the world, and you may have a different opinion. You may feel differently, or you may find other sustainability topics more urgent.

Would it not be good and interesting to have a system (a database and a website) that contains company data regarding all kinds of sustainability topics and where investors can select those they find relevant and set some form of quantification that allows them to make their own selection based on content? I.e. a website where people can define their own criteria? Perhaps share them, see what others have picked and how an index based on their criteria would look like? And for those interested in profit as well, where one could see how well these companies are doing? That sounds like a plan to invest in. A risky plan.

 

(*) See for example the the Global Sustainable Competitiveness Index produced by SolAbility, the SDG Index and Dashboards Report produced by the Bertelsmann Stiftung and the Sustainable Development Solutions Network, and thirdly, the Country Sustainability Ranking produced by RobecoSAM and Robeco. Interestingly, the Sustainable Society Index produced by the Sustainable Society Foundation comes to a completely different ranking at least for its environmental part.

With many thanks to C. for helpful comments and suggestions