Discover ESG investing challenges and strategies. Is it possible to measure company ethics and build an ethical portfolio?
In the summer of 2021, Amazon faced significant scrutiny over its labor practices, raising important questions about ESG investing and ethical investment strategies.
The 5,800 workers in the company's warehouse in Bessemer, Alabama, frustrated by working conditions, were trying to decide whether to join the Retail, Wholesale, and Department Store Union. This kicked off a trend the e-commerce giant would clearly prefer to avoid. Amazon has publicly stated it believes its workers would be poorly represented by such a large union and insists that it offers "some of the best jobs available everywhere it hires."
This was the stance Dave Clark, CEO of Amazon Worldwide Consumer, maintained in response to Senator Bernie Sanders arriving in Alabama to support the union vote. Clark called Amazon a "progressive workplace," which was quickly criticized by Representative Mark Pocan of Wisconsin, who referenced the poor working conditions and lack of bathroom facilities faced by Amazon delivery drivers across the country.
Before Clark could respond, Amazon News retorted and categorically denied these accusations, only to have them repeatedly proven true in the coming days. Worse still, an article in The Intercept revealed that Amazon knew the pressure to meet delivery quotas meant that employees could not stop to find or use a bathroom. On April 2, Amazon issued a formal apology to Rep. Pocan and promised to find a solution to the problem it labeled "industry-wide."
Amazon's Ethical Challenges
This incident is just one example of Amazon's business practices being called into question, highlighting the challenges of ESG investing and ethical business practices. The online retailer has faced a Senate Budget Committee hearing, an investigation from the National Labor Relations Board, and considerable outcries from its workers experiencing grueling and unsafe conditions in the wake of COVID-19. Not to mention, Amazon's dubious manufacturing practices. In 2019, the company did not sign a pledge refusing to consign, purchase, or sell apparel from a list of 300 factories in Bangladesh that were found unsafe, following the 2013 building collapse that killed over 1,100. Companies that did sign on include Wal-Mart, Target, Costco, and Gap.
Despite these issues, Amazon's stock has risen 103% in the last five years, leaving us wondering: how much influence should ethical concerns have on investment decisions? And is it possible to be considered an ethical investor?
Measuring a Company's Ethics
The first question we have to answer is: how do you measure a company's ethics and practices? This is crucial for ESG investing and ethical funds. Obviously, this is highly subjective and undoubtedly will differ from investor to investor. Funds that label themselves as ethical often run into this dilemma.
For example, State Street Global Advisors run a Gender Diversity Index ETF which aims to "provide exposure to U.S. companies that demonstrate greater gender diversity within senior leadership." However, for years, one of their largest holdings was Nike, which has come under fire for discriminating against its female-sponsored athletes, allegations of forced labor within its supply chain, and failure to ensure all employees receive a living wage. So, while Nike fits the fund's narrow ethical criteria, it may disappoint some of its more eagle-eyed investors.
Consequently, investors attempting to make ethical investment decisions may be better off selecting individual stocks they can audit themselves.
Challenges in Building an Ethical Portfolio
However, if you are looking for the next growth stock/ethical enterprise, you may be looking for a long time. Karen Firestone, CEO and co-founder of Aureus Asset Management, stated that if we take the S&P 500 and remove every company that pollutes, has disturbing labor practices, or the potential to distribute illegal materials or hinder privacy, "we are down to about 10 names."
Warren Buffett believes that it is "very hard to evaluate what a public company is doing" and therefore does not consider ethics when investing. Berkshire Hathaway has owned everything from tobacco to oil to wind turbines. However, it's important to remember the managers at Berkshire are beholden to their shareholders and therefore prioritize gains over all other considerations.
Conclusion: Is ESG Investing Worth It?
While finding a perfectly ethical company may be challenging, considering ESG factors can lead to better long-term investments and align with your values. According to Moira O’Neill, head of personal finance at Interactive Investor, "there is a growing body of evidence that suggests companies with good environmental, social and governance (ESG) practices should be expected to outperform their less ethical counterparts, especially as interest in sustainability and the environment grows." As long-term investors who pick individual stocks, it's definitely worth noting. It's also easier to hold a stock through downturns and recessions when you agree with their business practices and believe they're working to be responsible.
A simple way to check how a company performs is an ESG risk rating (you can take a look here). While not perfect, it's an easy and quantifiable way to compare a company's practices to its competitors. Controversial Amazon ranked 455 out of 462 retailers.
Should you invest $1,000 in Amazon right now?
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