Money and ethics

By Carlos Joly

Money matters. Money in national budget allocations determines who gets health care, who gets educated, who gets unemployment cover, which industries and companies are favored, and whether the country goes to war. Obviously, national budget line items say much about a society’s moral beliefs, its governance and who wields real power. As the song says, money makes the world go round. Recognizing this, earlier moral and political philosophy went hand in hand with economic theory. Locke theorized that work (working the land) is what makes common property private. Bentham reasoned that inequality interfered with felicity and favored greater equality of economic shares in societal organization. Marx’s essay on The Power of Money is a moral masterpiece. But this recognition of interconnection, this cross-fertilization of ideas, is largely absent from contemporary thinking. Moral philosophy and finance theory ignore each other.

I take it as commonly understood that financial capitalism rules the world, so will not belabor the point. But we generally fail to appreciate the extent to which financial capitalism has managed to expunge ethics from money matters. For investors, clearly, money matters while ethics doesn’t. The money institutions that invest the public’s savings (pension funds, sovereign funds, insurance reserves, mutual funds), and their managers and regulators generally adhere to the view that markets – including financial markets – decide best, the good being identified with consumer preferences. We know that mass market consumer preferences are formed and manipulated by media and business in a way that is primarily satisfactory to business profits and not much else; but that is not factored in.

Preferences are only at the margin informed by what is good for the social, physical or mental health of the public; or by what really serves nature and sustainability. So, instead of seeking to satisfy moral values, policymakers and investors look at wants created by product offerings as the criterion for decision. Consumer preferences and money manager preferences are taken to be correct ipso facto, not requiring moral assessment. The same has taken hold in the political arena of what used to be democratic practice. Now, propaganda based on psychographic data-mining drives consumer electoral behavior just as product marketing drives consumer purchasing behavior. The outcomes are taken to be self-validating, requiring no further questioning. What matters gets decided by what people like. We’ve become a polity of emoticons. All that counts is the unreflective non-deliberative passivity of liking. In the investment world, this is expressed by the triumph of computer-driven passive investing.

Moral Relativism

Several strands of thinking conflate in making our world amoral. Since my likes are as valid as your likes, and liking is the criterion of worth, moral relativism carries the day. In other words, since moral truth is supposedly subjectively personal, my moral likes are as worthy as yours, we can dispense with morality. This serves to justify the business case dogma in money management—that what makes money, being a reflection of what people like/prefer/ choose to buy is the only valid justification for investment decisions. If they chose a gas guzzler or an EV, either way is equally OK. The world’s biggest sovereign fund, the Norwegian Government Pension Fund-Global (NGPF-G), popularly known in Norway as Petroleumsfondet, generally espouses this view, holding that any inclusion of environmental or social or governance considerations (ESG) must make business sense, must contribute to profit maximization (the only exceptions being the exclusion of companies with grievous human rights or environmental violations; but neither the UN SDGs nor sector weights reflective of transition to a greener economy are factored into the index the NGPF-G performs against or its asset allocation). The litmus test is whether ESG is as “material” to making more money as non-ESG investments are. Otherwise enlightened investors like Jeremy Grantham also sideline ethical judgment. In defending divesting from fossil fuels, he says: “Ethical arguments for divesting are simply not necessary. They are a pure bonus.” This is misleading.

Let’s take two examples to illustrate. First, climate change. If coal mining and coal-fired power plants were profitable (as they can be made to be with subsidies), would that make them responsible investments? Does materiality override the moral imperative to reduce emissions? We want to avoid climate change for its catastrophic impacts on mankind and nature, not just because we can make money in transitioning to a greener economy. Responsible investment cannot apply only to cases where profitable returns coincide with our moral values but must derive from a minimum overlapping consensus of the ethical values that form a society’s morality.

Second, critical corporate decisions like dividends and leverage. Often overlooked is the fact that how much a corporation’s board decides to allocate to dividends from profits necessarily involves moral considerations: how much workers should get vs shareholders, whether to prioritize current shareholders short-term or the company as an ongoing concern long-term; and in leveraged buyouts at what point leverage and cost-cutting imperil a company’s future as private equity managers maximize their take. How profits are made and what we value morally are ineluctably intertwined.

Many institutional investors honestly want to be on the side of climate change containment and sustainability but are hampered by the mistaken view their decisions must be justified on profit-making grounds. The Responsible Investment movement (see the UN-validated and supported Principles of Responsible Investment, which claims 2000 signatories with assets under management totaling $80 trillion) is kidding itself – without moral judgment Responsible Investment cannot be responsible.

Efficiency Rules

Add to this a related form of thought: the conflation of efficiency with right. In modern portfolio theory, the price of a stock or bond at any given moment is not only “efficient” but is the right price, as by definition it is supposed to reflect all available information to market participants, who are also supposed to be acting purely rationally in each seeking to maximize their profit. The theory is simply self-validating inasmuch as the weight of price-making in the market is now done passively by index-replicating portfolios. Institutional portfolios continuously recalibrate to follow the market indexes, thus guaranteeing the inevitability of irrational pricing in the form of bubbles and crashes. The application of modern portfolio theory is its reductio ad absurdum. It fails on its own terms.

Compounding the problem, ethical inquiry into money management by moral philosophers is largely absent. Mainstream philosophy seems unconcerned with money as a philosophical matter, has left the field of money and economics, with a few notable exceptions like Michael Sandel (Harvard) and Thomas Pogge (Yale), who worry about money and markets, and economic justice and poverty. Look up Philosophy of Money in Stanford Encyclopedia of Philosophy or in Wikipedia and you come up empty. You get Philosophy of Biology, of Religion, of Education, of History, of Film, of Language, Neurophilosophy, Feminist Philosophy, and so forth. But the only reference to Philosophy of Money is Georg Simmel’s work from 1900, despite the obvious ontological puzzles and moral dilemmas posed by contemporary finance.

In short, this is a twofold appeal: to Responsible Investors to lose their fear of justifying their better instincts by daring to take up moral argument, and to practicing philosophers to wake up to the moral issues at the heart of our money economy.

Carlos Joly is a Fellow at the Cambridge Institute for Sustainability Leadership, Cambridge University. He worked many years as a portfolio manager and is active as an investor. He pioneered the integration of environmental and social issues in institutional investment and in fiduciary duty, served as Chair of the Expert Group that drafted the UN Principles of Responsible Investment, and as advisor to leading French institutional investors. He learned philosophy at Harvard with Rawls, Quine, Putnam, Nozick and Cavell.