Author: Jose Carlos Valer, PhD., MBA
Current textbooks and standards are only sometimes up to the challenge.
Recently, we started sharing polls to encourage a discussion around the moral and ethical challenges of ESG. We asked:
The results and comments were overlapping on one theme: there was no clear answer. Something was off, the case was unclear from ethical point of view, but at the same time difficult to pinpoint it as a clear foul. Unlike the standardised tests of the CFA code of ethics, issues on this topic still need to be clarified for most practitioners today. Moreover, involving a genuine moral concern in an ethical question like this presents a higher challenge to finding the "right answer."
A recent study (Flugum & Souther, 2022) suggested that managers who underperform the earnings expectations (set by analysts following their company) often publicly start to discuss their focus on ESG. But when they exceed earnings expectations, they make few, if any, public statements in relation to ESG. Hence, doubt arises about the possibility that sustainable fund managers, who direct their investments to companies publicly embracing ESG principles, may overinvest in financially underperforming companies. Hence, the case confronts issues of loyalty to clients versus commitment to employers making this case a daunting scenario to take on the current trending wave of sustainability investments.
Why is it so difficult to elucidate? Laws and regulations standardise the history of logic and reasonable practices. That's easy if present: anyone who breaks the law is unethical. However, ESG has the real-life flavour characteristic of yet to be properly regulated or even defined, as recent news of events around sustainable investments show.
So, how to decide ethically here? A good review on the basis of ethics could help. Ethics is often constrained to assess the burden of proof of breaking the law. But, as I usually suggest in my lectures, it comprises additional aspects that we should consider:
Law/Regulation. Suppose the actions are breaching the law/regulation. Not useful here, given the lack of current adopted rules or precise definitions around ESG characteristics, modes, and vehicles.
Knowledge. Are they knowingly diverging attention from their financial results? It is a matter of knowledge (the argument of options A, B, and C in the poll attribute reasonable doubt about an unethical move).
Freedom of intention. If the CEO knew, did they decide to switch the narrative forced or acted freely? A CEO "forced" by the board is not ethically excusable as the executive could always say no. Although facing some consequences, their decisions would keep them ethical. The same applies if pressured by the market or investors.
Characteristically, the benefit of the doubt is still present in the absence of clarity from authority face regulators about the precise definition of sustainability and ESG.
The intuition of the poll voters is correct: something could be wrong. However, in the absence of regulation, or concrete proof about the ethical aspects 2 and 3, the moral questions arising are more challenging. The final test, as most in the realm of ethics, relies on assessing the action effects on improving or decreasing the Decider as a person. Of course, arguments of philosophical relativism, political nihilism, culture emotivism and other -isms stances would justify different reasonings. However, the responsibility for one's actions (and their effects on others) will remain. Now you must answer: If not prohibited by law or current best practices, is it still ethical? Just consider how many laws in the past were unethical by today's standards, reflecting the moral zeitgeist of the time.
On a practical note, let's also remember:
The emergence of new unregulated participants involved in the qualification of sustainability and ESG suitability may introduce further ambiguity in definitions and regulatory contexts, making it prone to ethical dilemmas.
As responsible stewards of capital, CFA professionals' duty is to reach for transparency about the criteria by which they are investing and facilitate clients to decide whether to allocate money based on their ethical stance.