Politics: “Killing our beneficiaries”

You might have imagined that charity and ethics would go hand in hand, but apparently not. Neil Riddell explores the absurd and worrying rejection of ethical investment by the charitable trust.

Things can get very, very confused when councillors discuss ethics in Lerwick Town Hall. In the last two years alone, sitting with charitable trust bonnets regally atop their heads, they have between them expressed the following views: although smoking kills around one Shetlander a week, we should still try to make money out of tobacco companies; thank goodness we have shares in BAe Systems (a major manufacturer of lethal armaments) because they stop wars and deaths; we should not put investors in the position of feeling burdened by any moral considerations.

Deliberations on the apparently thorny topic of ethical investment can be quite revealing for observers of council/trust business. Amid avalanches of planning applications, capital projects, working groups, grant requests and the like, it is one of the few occasions when the political beliefs and philosophies of our elected members come to the fore.

Last month saw the latest overwhelming rejection of any notion that Shetland Charitable Trust should invest in a more ethical manner. The trust invests the bulk of its oil-derived reserves on the stock markets worldwide, with roughly 90 per cent of the £59 million invested in the UK held in shares in companies listed on the FTSE100 index of leading shares. A further £59 million is held in overseas shares and £47 million in government bonds.

Around £25 million is held in local investments through subsidiary companies such as property company SLAP and SHEAP. Many trustees believe that other local investment opportunities like Viking Energy and paying for and leasing the new Anderson High School back to the council could prove a more stable source of income in the future.

But in the meantime, at last week’s prices the fate of much of that £200 million of our money lies in the hands of the maneuverings taking place in the world’s financial capitals. Because a “market tracker” portfolio of shares, designed to match the performance of the stock market, is used, the money is effectively managed by a computer and so the trust indirectly holds shares in any and every company on the FTSE all-share list of around 600 firms.

For a small number of trustees that is a matter which rests uneasily with their conscience. It means Shetland is profiting from the activities of companies including BAe Systems, now the subject of another corruption investigation by the Serious Fraud Office (after the last one was abruptly halted by Tony Blair in 2006). One of several allegations being investigated is as follows: at the start of this decade, BAe sold what former international development secretary Clare Short described as a “completely useless” £30 million military radar system to the Tanzanian government, with an alleged bribe of £6.1 million paid to the Swiss bank account of a middleman in the deal. The impoverished African country does not even have an air force.

Other firms with shady ethics on the FTSE100 include mining company BHP Billiton and another weapons company, United Technologies Corp. It is argued that making money out of such firms – BAe makes nuclear submarines – directly contradicts the SIC’s status as a nuclear-free local authority. Gussie Angus and fellow trustees Rick Nickerson and Jonathan Wills have been vigilantly, but to little avail, trying to persuade their peers that they cannot simply divest themselves from the moral consequences of how they choose to invest.

They got a long-awaited report on the matter from investment consultant Hymans Robertson at last month’s trust meeting. His advice – far from binding, it should be noted – was that avoiding, for example, investing in tobacco firms could lose the trust up to £100,000 per annum. If you want to quantify that loss, it points to a status quo whereby we are earning £2,000 for each death of a Shetlander from lung cancer and other smoking-related diseases. As Mr Angus pertinently asks, is “killing our beneficiaries” really in the greater interest of the trust?

Hyman Robertson’s representative included the caveat that past events are “not necessarily a guide” to the future, but that seemed to elude the ears of most trustees. In the absence of Mr Angus and Dr Wills that day, Mr Nickerson was unable to find a single supporter for his very timid proposal for a report on the feasibility of testing a “small amount” of the funds on an ethical portfolio for a five-year period.

Mr Angus told this magazine he would make no apology for continue to press for a change of tack, though he generally restricts his advocacy to speaking out against tobacco. “I feel strongly that when NHS Shetland produces figures which show smoking-related illness kills a Shetlander per week on average, we have a civic duty to respond to that empirical evidence differently than we do. I’ll make no apology for continuing to plug away at this at every opportunity.”

The trust deed stipulates that trustees must act in the best interests of the inhabitants of Shetland, within the bounds of charity legislation. Trustees’ latest annual report states that trustees expect their fund manager to use investment criteria as the “primary consideration” but that “social, environmental and/or ethical considerations will be taken into account . . . to the extent that their assessment shows that they will benefit the shareholders financially in the long term”. But legal advice from lawyers Turcan Connell is that trustees can pursue an ethical investment portfolio so long as they “follow the law, put aside personal preferences and take proper advice”. It does not stipulate how one is to simultaneously put aside personal preferences and make moral judgements.

The biggest problem with the majority of trustees’ stance on this matter is a craven lack of moral equivalence, arguably the result of an excessively inward-looking mentality. Imagine a hypothetical scenario. A mining company is found to be dumping toxic waste off the coast of West Africa; presumably we would happily carry on profiting from their activities. What if the toxic waste was being dumped off our own coast? Surely no-one would seriously believe that there would not be an uproar, followed by an immediate severance of any ties with the firm in question.

Critics of investing ethically argue that the trust’s fund only exists because of proceeds from the oil industry. But is money really the only consideration for a modern, forward-looking community in the 21st century? Do the 18 councillor-trustees accurately represent constituents’ views? If the views of both sides in the debate on Viking Energy’s proposed windfarm are to be taken at face value, islanders harbour a great deal of concern about the environmental consequences of what is potentially the charitable trust’s biggest money spinner yet.

Perhaps more importantly, where is the concrete evidence that investing ethically does not pay in 2009, and particularly that it will not pay in the future? Take Norway’s sovereign wealth fund (admittedly a good bit bigger at £259 billion, and they don’t draw on it at an unsustainable rate, either). As the biggest equity investor in Europe, they hold a great deal of clout and are using it to push climate change onto the agendas of big energy and utility companies.

Of course, the charitable trust can never expect to have that kind of influence. But the Norwegian fund’s chief executive Yngve Slyngstad has been pursuing a rather more selective approach than the stewards of our reserves, blacklisting some 30 firms purely on ethical grounds. The oil fund does not invest in companies which are involved in activities including violating human rights, producing nuclear weapons or other armaments, using child labour and labour policies which are not up to scratch. And its reserves are very healthy indeed.

Mr Slyngstad is clear that companies which engage with issues like climate change, and those who behave more ethically, will prove to be much more profitable in the seismic and turbulent years ahead. “We are an investor with a 30-year horizon,” he said recently. “We think that in the long run the profitability of companies will be affected by how these bigger issues are handled. This is straight in line with maximising the return of the fund.”

The past two years of turmoil on the market would also seem to suggest that trustees who talk of not investing ethically because of the “high risk” it would pose to Shetland’s oil reserves have not got it quite right. As environmental campaigner Vic Thomas pointed out in a strongly-worded letter to The Shetland Times last month, the ethical Co-operative Bank goes from strength to strength and has performed admirably well during the banking crisis.

Mr Thomas described comments by Betty Fullerton, Allison Duncan (responsible for the remark last year that he thanked God for companies like BAe Systems because they prevent wars) and Laura Baisley during last month’s trust meeting as “appalling”. He accused them of expressing little or no conscience and deduced that they “clearly support animal and human cruelty, bullying, murder, pollution, human rights abuses, torture and a host of equally despicable activities carried out around the world”.
Mrs Fullerton – whose stance was particularly surprising to some as she is a former chairwoman of Shetland Health Board, which actively campaigns against smoking – had opposed any move towards ethical investment because it would be “wrong to pursue personal interests” and “we should not be prepared to accept high risks for the trust”.

She is one of several trustees who argue that there would be so many difficulties inherent in deciding what is, and is not, “ethical” that it would be impossible to reach a consensus. Mrs Fullerton says she is “personally against smoking and companies who exploit children” and therefore would like to see less investment in those areas, adding that “others abhor those companies who use animals in research, build arms and missiles or destroy our environment to name but a few”.

However, she fully accepted the advice that trustees should not put their personal views before the need to achieve the best financial returns for, or be in the best interests of, the people of Shetland. “I still believe that, but if the subject is debated again and evidence shown that ethical investment can bring the same returns I will listen,” she told Shetland Life. “So despite what some may think the whole question is not straightforward and, although we can play with our own investments in the pursuit of our own opinions on ethics, I cannot accept that we can do so as trustees of Shetland’s money.”

But an increasing number of financial analysts are now arguing that sustainable and ethical investments are in fact a much safer bet – a thesis backed up by recent research from Experts in Responsible Investment Solutions (EIRIS). Ninety per cent of wealth managers surveyed reported that their portfolios of responsible investments have been performing “either the same or better than” their other portfolios. The study’s findings have been all over the pages of financial publications this month.

You might say such an organisation would have a vested interest in such a finding, but you might equally say that asking someone from the non-ethical sector – as the charitable trust did last month – is even more likely to skew the picture. Chief executive of UK Sustainable Investment and Finance Penny Shepherd said recently: “Some people pick green and ethical investments just because this makes good financial sense in today’s changing world. But more and more investors also want their investments to make a positive contribution to society and the environment.”

Set against that, trustees’ refusal to even consider a modest experiment with a tiny portion of their funds in an ethical fashion – when they have been content to lose more than half of the £3 million which was invested on the winners-and-losers playing field of the currency markets – seems quite staggering. The fact that you can comfortably count on one hand the number of our elected representatives willing to even countenance such an idea is a depressing one indeed.

Neil Riddell