Regulating Your Morals with Your Money

Do Australians want an army of social engineers to control their investments?

Clearly some do, as shown by the existence of so-called ethical funds.  But then, most do not.

Well, we are about to lose our choice and be forced into the hands of the social engineers.  The Financial Services Reform Act, passed in the dying hours of the last Government, imposes disclosure requirements on all funds managers which will, in effect, force them to inquire into the labour, environmental, social and ethical standards of the Australian corporate sector.

At first sight, the legislation appears relatively innocuous.  Who could object to disclosure on labour, environmental, social and ethical matters?  No doubt the Minister was persuaded that the amendment was harmless and would even aid "transparency".  Upon closer examination however, the legislation is much more intrusive than it seems.  The transparency is more apparent than real.  In practical terms, disclosure requires the institutions to formulate and express attitudes and practices on four matters which range from difficult to impossible to define.

Institutions will be forced to decide what is an ethical activity.  Ethical funds have for example commonly declared armament manufacturers such as Boeing to be unethical.  Yet these funds have frequently invested heavily in the computer manufacturers that provide the guidance systems for Boeing's missiles.  They also over-looked the fact the missiles manufactured by Boeing protect the lives of many innocent people.

The funds will be forced to decide what constitutes good labour standards, for example, whether it is adequate to follow the laws of the land or follow the dictates of the union movement.  They will be forced also to decide and measure environmental standards -- not just those required under law, but above-the-law pushed standards.

In theory, businesses could state that they do not take these matters into account, thereby avoiding scrutiny and the subsequent paper chase.  In practice, however, no institution will state that it does not take such matters into account, in part because if it did, pressure groups would label it as unethical or anti-social.  Silence would be treated as guilt.  In any case, it is a reality of business that those matters are almost always "taken into account" to some degree.

Contrary to the claims of the ethical lobby, these provisions will cost investors.

The provisions will not only impose extra reporting requirements but require funds to hire social engineers, ethicists, environmental scientists and labour market analysts to screen for good behaviour.  Of course the cost of these services will be borne entirely by investors.  Many funds managers actually like the extra work, as it means more money to them.  Judging from existing ethical funds, the reporting requirement could force management costs up by as much as 45 per cent.

Moreover, there is no reason to believe that an ethical screen will compensate for higher management costs through higher yields or lower risks.  Indeed, if anything, the evidence points in the other direction.

Forcing unnecessary and costly investment criteria on investors is not only a breach of their rights, but a serious threat to their future.

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