Will the UK Outlaw Ethical Investing?
OK, so the answer to the question in the title is almost certainly “no,” but outlawing ethical investing is precisely what is being implied, no doubt inadvertently, by a new plan being attributed to the UK’s Labour Party.
Over the weekend, several UK news sources reported on a press release indicating that the Labour Party’s leader, Ed Miliband, was about to announce his intention (if elected) to impose tough new rules on the financial industry. The idea was to be put forward during a speech at the party’s annual conference this past weekend. According to the Daily Mail,
Mr Miliband is proposing a sweeping new legal duty on any financial service which manages savings, including pension funds and banks, to maximise the saver’s returns. Failure to do so would mean them breaking the law.
(While I haven’t seen the actual press release upon which this analysis is based, a very similar report appeared in The Guardian.)
On the face of it, this is just another promise by a politician to fight for the little guy by imposing constraints on big business.
But hold on a minute. As Tim Worstall at Forbes.com astutely points out, requiring a bank to maximise a saver’s financial returns implies a legal duty not to pay attention to any factor other than money. No more attention to sustainability. No more doing good deeds. No more avoiding investing in tobacco or arms dealers. It’s gotta be all about the money.
But focusing on something other than money is precisely what financial institutions promise to do when then offer various ‘ethical’ or values-based investment instruments. The promise made by such funds is that they’ll aim at a “solid” return on investment, while at the same time paying due attention to social and/or environmental concerns. Miliband’s proposal would make such funds illegal. Indeed, if taken seriously, Miliband’s proposal goes much farther than that: it would criminalize all attempts at corporate social responsibility by financial services companies.
Indeed, legally requiring banks to maximize return to savers is exactly parallel to the (fictional) requirement for corporations to maximize return to shareholders. (Why “fictional?” Because the directors of a corporation are only legally obligated to serve loyally, not to maximize profits per se.)
Now as Worstall points out, such announcements regarding what a politician is going to say sometimes don’t come true. And heaven knows that even if Mr. Miliband does or did make the promise out loud, there’s no guarantee that he will make good on it, even if he has the opportunity. Hopefully he or his advisors have seen the folly in such a law, and will find some subtler way to achieve their policy objectives.