Fast food, bio pranksters and my struggle to invest ethically

Sasha and Cedrique had pulled it off. It was breathtakingly brilliant. They had managed to set up a stand at an organic food convention in Houton, Holland. The trouble is that they don’t own a restaurant or a genuine business, or even a menu of organically sourced food.

Hours earlier, the pair strolled into a local McDonald’s and went wild, splashing out on the delights of the ‘Saver Menu’. Using some cutlery and cocktail sticks, they carefully removed their ‘supersized’ meals from their recyclable packaging and transformed them into a delightful selection of canapés.

They marketed it as their new organic range.

Somehow these to unassuming young Dutch gentleman proceed to fool some of the biggest food experts in the Benelux region. One gentleman who was sinfully indulging in a calorific Fillet-O-Fish was whisked away to a higher plain:

“Tastes like fish, reminds me of cod. Rolls around the tongue nicely, if it were wine, I’d say it’s fine”.

The duo took it to the next level, asking visitors how their ‘organic’ treats compared to McDonald’s.

A young woman replied, “It definitely tastes a lot better and the fact that its organic is a good thing”.

Another passer-by added, “This absolutely has a lot more taste to it than McDonald”.

Meanwhile, a lady from a rival stall – one of the experts – decided to weigh in: “It’s definitely a lot tastier than McDonald’s. You can just tell it is a lot more pure”.

Well our dear friends Sasha and Cedrique learnt a lot that day. First, McDonald’s tastes really good. And second, people can be gullible and accept things at face value. You can watch the YouTube video here.

It’s an unfortunate human trait. We often accept the stories we are told with blind faith. For me, when it comes to investing in all-things-green-and-ethical, it feels pretty much the same. I’ve noticed that companies will often promote these green-based environment initiatives, yet operate in a way that’s opposite to the cause they champion.

On “Earth Day” in 1999, Sir John Browne – the head of BP – received an award for environmental leadership at the UN building in New York City. He had already been knighted by the Queen for his efforts and praised by business leaders globally. Under his stewardship, BP’s share price broke new highs.

At the time, BP was the second largest oil company in the world, and the largest supplier of oil and gas to the United States. This award defied convention. Environmentalist traditionally vilified the oil and gas industry. So why the change in heart?

It started a year earlier when BP endorsed the famous Kyoto Protocol on emission targets. If you remember, this was the one where the US – the world’s biggest polluter at the time – refused to sign. BP pulled out of the oil-led climate collation, which lobbied hard against Kyoto. It rebranded itself from “British Petroleum” to “Beyond Petroleum”.

Then on 20 April 2010, the BP-operated Deepwater Horizon oil rig exploded and sank, killing eleven workers. For 87 days, 210 million gallons of crude oil gushed out into the Gulf of Mexico from the seafloor. It was the worst environmental disaster in US history, killing wildlife, damaging marine ecosystems and destroying local fishing industries.

It wasn’t just an accident. Apart from the appalling environmental fallout, it could have been avoided. In the US, the national oil spill commission set up by the White House identified a series of safety failures and disastrous cost-cutting decisions. And, this wasn’t a one-off event. BP had been embroiled in numerous environmental disputes prior to this disaster, such as the environmental damage cause in the fragile oil-rich Arctic.

BP did meet its Kyoto Protocol target, although at no net cost. Other programmes, such as solar-powered petrol stations, school programmes and urban air initiatives were also cheap to implement and helped boost the company’s green image. It was just marketing.

It’s a classic case of what we call in the investment industry, ‘green washing’. However, BP is by no means an isolate example. I chose it because I had bought the story and had been invested in this company, a favourite among UK pension schemes – It was as great dividend payer back then.

Unfortunately ‘green washing’ also occurs in the asset management industry I work in. Many firms, claim to adhere to social responsible investing (SRI) or consider good environmental, social and governance (ESG) when making decisions. I’m not a fan of three-letter-acronyms, so let’s drop the TLAs here and call it just ethical investing.

In every industry there is the good, the bad and the ugly. The bad and the ugly do little more than apply an index filter on an existing investment strategy. They see ethical investing as nothing more than a fad that they can cash in on.

Good portfolio managers, however, are prepared to get their hands dirty. They analyse their highest conviction ideas at a fundamental level to avoid companies at risk from unethical practices that are not reflected on a balance sheet or income statement.

I am not a tree-hugger, nor an evangelical environmentalist. I just don’t want to be exposed to unnecessary risk. Reckless companies are not good investments in the long-run and so I salute those portfolio managers that care.

As an investor, considering social and ethical issues make sense, especially if you are after sustainable investment returns for the long-run. No one wants unnecessary negative surprises to wipe out all their hard-earned portfolio outperformance. Therefore, struggling to invest ethically is worth it.

Those Dutch ‘bio’ pranksters taught me not to accept what we see at face value. It’s a bitter lesson that I have learnt.

We are big fans of bio-food in our household. My wife swears by it and I have to admit there are certain products I like, such as eggs, milk and yogurt. However, you need to read the label. It might be organic, but it might also be bad for you. The other day I looked at an attractively packaged zero-fat raspberry yogurt – It had more added sugar than a can of coke.

Therefore, question what you invest in or buy.