Simplicity and Vanguard Investment Funds: Follow Up
Dr Robert Howell
Introduction
This article reports on discussions with Sam Stubbs, CEO of Simplicity, about the article Simplicity Fund and Vanguard Ethically Conscious International Shares Index Fund – Are They Ethical? and reflects on the processes of engagement and reporting for all funds. That article assessed the claims of being an ethical fund from a content and construct validation method. Establishing the validity of a measure means showing the measure actually measures what it claims to measure. There are two steps to take: content and construct. Content validity requires consideration at a conceptual level: does the measure make sense, and is it rich enough to generate the secondary concepts, schema and sets of obligations to be able to define a relationship that guides behaviour. Construct validity requires empirical considerations: is the application of the measure consistent with other empirical evidence?
Simplicity uses the notion of harm and acting with a conscience. The article defined the moral domain with an analysis of the human-human and human-Earth factors that New Zealand has developed in theory and practice, and it was shown that this passes the content test. However, Simplicity did not pass the construct test. It has invested in JPMorgan Chase which has invested in more fossil fuel operations that any other bank in the world. In addition it was noted that the engagement and reporting processes were not adequate.
Discussion With Sam Stubbs
There was agreement that the conceptual argument outlined in the article is soundly based. There was agreement that the current engagement and reporting activities of Simplicity needed improvement, and as it currently stands, the public information provided by Simplicity is misleading.
It was agreed that Simplicity’s Statement of Ethics (acting with a conscience, and doing no harm) needed to be qualified by a public statement that the way Vanguard is structured and operated meant that there would be investments that conflict with this Statement.
It was agreed that it was not possible to necessarily engage with all companies the fund was invested in (for practical reasons). However, Simplicity is dependent on Vanguard which uses a standard approach based on Board Composition, Oversight of Strategy and Risk, Executive compensation, and Shareholder Rights. This is used with other Vanguard funds to spread its costs, but its engagement is not comprehensive. The Ethically Conscious International Shares Index Fund has invested in over 1600 companies.In 2020 Vanguard used its standardised process for 655 companies. In addition they have more extensive engagement with a limited number: 25 in 2020.
Stubbs said that he would discuss (privately) with Vanguard to try and engage with companies that Simplicity felt important. He said that he is confident that his way of engaging with Vanguard will continue to deliver practical outcomes. These would be publicly reported on.
Reflection
Because very few, if any, companies are not harming the Earth in some way or other, it is almost inevitable that there will be companies with unacceptable practices that are overlooked by the Vanguard process. Banks are a particular concern. There are around 100 banks included in the Vanguard Ethically Conscious International Shares Index Fund, and a number would likely not pass a close scrutiny. There are other companies in the Fund that are questionable, such as Fox News, which have a track record of news distortion and opposition to ethical energy use. Ethical Consumer readers have voted on their ten least ethical companies and five of those (Amazon; Nestle; Tesco; Coca Cola; Barclays) are in the Vanguard investment list [i]. Because an ethical investor would want to see an engagement with those companies that are causing more harm than others, it is a matter of choosing priorities for engagement.
Ways to limit the possibilities of including blatantly unethical companies would be to reduce the number of companies in the Fund, or to employ or contract with people to carry out more engagements. The latter action (and maybe the former) will increase the costs of managing the fund. Other options include linking up with other Funds or agencies or groups which engage with companies that have poor track records regarding issues such as human rights abuse or environmental damage – issues that an investor with a conscience would be concerned about.
But ultimately the key is transparency about the selection of priorities and the process, so that those investors who wish to support the transition to more appropriate and less damaging business activity have the information they need.
[1] Ethical Consumer. Retrieved from https://www.ethicalconsumer.org/retailers/five-unethical-companies. Included in the ten are Shell and Exxon which Vanguard has excluded.