Practical analysis for investment professionals
03 January 2020

Book Review: The Ethical Investor’s Handbook

The Ethical Investor’s Handbook: How to Grow Your Money without Wrecking the Earth. 2018. Morten Strange. Marshall Cavendish Business.

For environmentally conscious investors to create portfolios totally consistent with their principles is no simple matter, judging by the following claims in The Ethical Investor’s Handbook: How to Grow Your Money without Wrecking the Earth:

  • “Overall — from drawing board to scrapyard — the typical electric automobile will pollute more than one with a small conventional internal combustion engine.”
  • Taking into account methane leakage throughout its supply chain, natural gas may be more harmful to the climate than coal.
  • Collecting the required hydrogen to power fuel cells consumes more energy than the fuel cells generate.
  • Carbon capture and storage technology have “never worked on a significant scale and most likely never will.”
  • As for renewable energy, the giant backup facilities needed for times when the wind does not blow or the sun does not shine require vast amounts of cobalt, half of which is extracted in the Democratic Republic of the Congo using child labor. “How ethical is that?” asks author Morten Strange.
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The fact that investing responsibly is complicated does not imply that investors should abandon the effort, in Strange’s view. Waiting for a perfect world, he says, gets one nowhere. Strange, a one-time oil engineer who is now an independent financial analyst based in Singapore, goes so far as to say that if necessary to get ahead, individuals should work for a time in the extractive industries he considers central to the world’s looming environmental crisis.

In the spirit of not letting the perfect be the enemy of the good, Strange offers a list of ethical values to help in deciding which investments to avoid. He acknowledges that investors will come down differently on their specific choices. To some, “ethical investing” means a progressive political agenda; to others, a libertarian-inspired disapproval of big government; and to still others, a faith-based opposition to alcohol, tobacco, abortion, pornography, and violent video games. All camps, Strange maintains, should favor basic respect for human rights and fair business practices.

For his own part, Strange rejects nuclear weapon and pesticide producers but might invest in corporations that engage in animal testing or violate human rights. He does not, however, regard ethical investing as solely a matter of ruling out certain industries. Activities that Strange strives to support proactively through his own investing include recycling, environmental restoration, and the protection of the water supply. He also comments, “I don’t think there is any downside to education,” which suggests that he is unfamiliar with the plight of US students stranded with huge debts and no degrees after the shutdowns of their for-profit colleges.

To help readers make their own selections, Strange refers them to a list of companies that score high on sustainability, compiled by the research firm Corporate Knights. He also recommends CFA Institute Research Foundation’s 2014 study Environmental Markets: A New Asset Class for guidance on socially responsible investing (SRI).

Strange recognizes that not all investors are willing to adhere to environmental, social, and governance (ESG) principles at a significant sacrifice of return. He argues that ethics and profit are compatible by pointing out that Norway’s sovereign wealth fund is the world’s largest, with over a trillion dollars in assets. More pertinent on this point than size, however, are returns. Bloomberg has characterized the Norway fund’s performance as “mediocre at best.”

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The Ethical Investor’s Handbook also falters on certain factual matters. Strange attributes to media entrepreneur Ted Turner the saying “Winners never quit, and quitters never win.” However, the original quotation, “A quitter never wins — and — a winner never quits,” appeared in inspirational writer Napoleon Hill’s Think and Grow Rich the year before Turner was born. Strange also erroneously refers to the country of “Columbia.”

A trigger warning is called for on a table that the author reproduces from a study purporting to calculate median IQ scores by country. Strange recommends living in a supposedly high-IQ country. The table shows a median IQ of 59 for the lowest-ranked nation, a score that the Stanford–Binet Intelligence Scales, Fifth Edition, classifies as “mildly impaired or delayed.” Suffice it to say that the national IQ study’s methodology has been hotly disputed.

Investment professionals should not read this book for its instructions on the mechanics of investing, which are pitched at a novice level. They will, however, benefit greatly from the author’s detailed account of depletion of the earth’s “natural capital,” unless they are already highly informed on the subject. Strange forcefully argues that the profitability of much of the world’s economic activity is misstated by a failure to account properly for the externalities it creates. Ethical investment professionals are obliged to confront these issues, if not necessarily to agree with the author on every point.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

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About the Author(s)
Martin Fridson, CFA

Martin Fridson, CFA, is, according to the New York Times, “one of Wall Street’s most thoughtful and perceptive analysts.” The Financial Management Association International named him its Financial Executive of the Year in 2002. In 2000, Fridson became the youngest person ever inducted into the Fixed Income Analysts Society Hall of Fame. He has been a guest lecturer at the graduate business schools of Babson, Columbia, Dartmouth, Duke, Fordham, Georgetown, Harvard, MIT, New York University, Notre Dame, Rutgers, and Wharton, as well as the Amsterdam Institute of Finance. Fridson's writings have been praised widely for their humor, rigor, and utility. He holds a BA in history from Harvard College and an MBA from Harvard Business School.

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