Post-Rana Plaza (manufacturing building) collapse in Bangladesh, industry businesses and individuals became concerned about their next step. Having heavily relied on this one address for their garments, the realization of the impact of Environmental, Social and Governmental (ESG) practices were highlighted. Once it became known how abusive working conditions there were, investors pulled out.
In recent years, it is not just business that counts; to get investments portfolios have to reflect a strong value system and the Rana Plaza just wouldn’t have cut it. One recent example of this was discussed in a Bloomberg article entitled The Cost of an Investment Conscience by Mark Gilbert of DBS Group Holdings with the promise of Scandinavian institutional investors of divesting from banks (in Asia, North America and Europe) which support destructive palm oil ventures in South Asia.
In other words investment dollars are influencing investee action as ESG factors become more prominent. Gilbert quotes AQR Capital Management co-founder Cliff Asness who explained:
If the virtuous decide they won’t own something, the sinners then have to, and they have to be induced to through getting a higher expected return than otherwise. This in turn is achieved through a lower than otherwise price. If the discount rate used by sinful companies isn’t higher as a result of constraints on holding sinful stocks then there was no impact. And, if the discount rate on sin is now higher, the sinful investors make more going forward than otherwise. If the virtuous are not raising the cost of capital to sinful projects, what are they doing? How are they actually affecting the world as they wish to?
Given the fact that Norway’s Rainforest Foundation has quadrupled in growth since 2009, it has become a world equity market major investor, imbuing it with a substantial influence over the companies in which it invests.
If Asia wants to retain its status as a global leader in the garment industry it looks like ethical awareness and preservation have to be at the top of its priority list.
