Investing: what’s ethics got to do with it?

16 March 2022


Ahead of a new publication from the IBE, Chris Cowton reflects on the relationship between ethics and investment.

I first became interested in the idea of a link between ethics and investment more than 35 years ago. In the 1970s, an attempt to launch an explicitly ethical ‘unit trust’ had been rejected by regulators. There seemed to be two main criticisms of such a proposal. First, it was believed that the restrictions on the range of companies whose shares could be bought would be so severe that financial returns would be wrecked. Second, it was claimed that it wouldn’t be possible to identify and manage such a portfolio properly anyway because the information needed to implement the ethical investment policies wasn’t available.

Fast forward, first, to 1984, and Friends Provident launched its Fellowship Trust investment product, on the back of the establishment of the Ethical Investment Research and Information Service (EIRIS). So, now we knew that it was possible; and this is when I began researching and writing in this area. But what about the financial returns? Opponents and proponents were quick to point to periods of under-or over-performance, respectively a practice that continues to this day. But as more ethical investment products became available and developed a track record, carefully conducted academic research made it clear that ethical investment at least wasn’t a financial disaster.

Ethical investment morphed into socially responsible investment (SRI) or appeared under various other titles, depending on local country preferences or the particular policies adopted. Whereas opposition to the Apartheid regime in South Africa had galvanised much of the initial activity, there was a ‘green’ turn in the 1990s, which also helped moves to include more positive criteria in portfolio selection. Thus, while there was a core of exclusion criteria – not just South Africa, but also companies’ involvement in things like alcohol, gambling and tobacco – funds gradually responded to the criticism that they were not a force for good but just a way for certain investors to keep their hands clean and their consciences clear. Another response could be seen in how funds dealt with company behaviour that they found problematic. In the 1990s, I was a member of the advisory committee of one of the early funds, and we were clear that we shouldn’t just divest. Instead, we sought to engage and explain our concerns, only selling up and walking away if we were unhappy with the company’s answers.

Over the years, this approach to investment became well established. But it was always a niche, albeit a fairly substantial one. Now fast forward, again, to the present day and it’s just not possible to avoid three letters: ESG. Economic, Social and Governance factors are now part of the investment scene. Active asset managers, under pressure from the massive growth of index trackers and exchange-traded funds, have been launching ESG funds and services at speed; data providers are churning out numbers and ratings at scale; companies are wondering what it might all mean and worrying about how they look.

Does ESG mean ethical investment has come of age? I’ve certainly heard some people say they are completely different things. But they sometimes do that by caricaturing previous approaches, knocking down a straw man with great gusto. Personally, I suspect the old and the new have more in common than recognised or admitted. Then again, if they don’t, where does that leave the many ordinary investors attracted to ESG funds because they view them as more ethical, apparently better suited to benefiting people and planet than traditional funds focused solely on risk and return? So: is there a link between ethics and investment in this era of ESG and, if so, what is it?

Annabel Gillard, an experienced industry professional and member of the IBE’s International Advisory Council, has been interviewing leading players in the UK investment industry about the place of ethics when analysing companies’ ESG credentials. The result of her work – Ethics: the missing ‘E’ in ESG investing? – will be published by the IBE on Monday 21 March 2022, but if you would like to hear a sneak preview of what she’s found out, please join us for a live webinar on Thursday 17 March, 12:00 - 13:15, when we will be joined by an expert panel who will discuss Annabel’s findings and also answer viewers’ questions.


Professor Chris Cowton
Professor Chris Cowton

Associate Director (Research)

Following a long career of leadership, teaching and research in the higher education sector, Chris joined the IBE in 2019 with a remit to strengthen its widely respected applied research and thought leadership, and a specific role of further developing our engagement with the education sector. In pursuit of the IBE's mission to base its work on high quality, relevant research, he now also leads on our training and advisory services.

Chris Cowton is Emeritus Professor at the University of Huddersfield and Visiting Professor at Leeds University’s Inter-Disciplinary Ethics Applied Centre. He was previously Professor of Accounting (1996-2016), Professor of Financial Ethics (2016-2019) and Dean of the Business School (2008-2016) at Huddersfield, having joined after ten years lecturing at the University of Oxford.

He is internationally recognised for his contributions to business ethics, especially his pioneering work on financial ethics.  In 2013 he was awarded the University of Huddersfield’s first DLitt (Doctor of Letters, a higher doctorate) in recognition of his contribution to the advancement of knowledge in business and financial ethics.

He is the author of more than 70 journal papers, has edited three books and has written many book chapters. He was Editor of the journal Business Ethics: A European Review for a decade (2004-2013).

He is also a visiting professor at University of the Basque Country, Bilbao (Spain), and has been a visiting professor at the University of Bergamo (Italy) and a member of the Ethics Standards Committee of the Institute of Chartered Accountants in England and Wales (2009-2018).

You can read Chris's extensive bibliography here

Discussion of ethics in public life, including business, often makes unhelpful sweeping generalisations that take us nowhere. ‘Politicians are only in it for themselves’, ‘businesses manipulate consumers’, etc. Such comments describe one end of a spectrum, perhaps, but they do a disservice to those who are trying to do so much better. The IBE plays a key role, in supporting high standards of business behaviour and I am delighted to use my research expertise to contribute to that mission.

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