Investing in truth

From ethics comes forth sustainability

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One of the more intriguing presentations at the tremendously successful Investment Forum held 5-6 March in Cape Town and 7-8 March at Sun City (both events were sold out) was by Andrew Lapping, Chief Investment Officer at Allan Gray, who delved into the incentives for acting ethically in investment. The bottom line is that the disadvantages of being dishonest in finance as much as in any other form of business outweigh the advantages considerably. Blue Chip followed up.

The question is why the tendency to lie exists. Lapping thinks it’s part of human nature: “I don’t think people necessarily think that they are lying – they’re just giving you what they hope to be true and then what they believe themselves and putting a positive spin on it. It’s necessarily about intentionally deceiving people, it’s just not giving the full version. It gives the happy side, and not the hard side.”

In the long run, a company’s share price will tell it’s own story about value created, but sometimes unpleasant facts emerge in the short-term which are either disclosed or covered up, with significant potential long-term consequences. “It’s hard for people to come to terms with making a mistake. You want to believe it’s not so, which unfortunately perpetuates itself. It also depends on the corporate environment whether it’s okay to admit you’ve made a mistake or whether you’ll get yourself fired.”

When the regulatory authorities are too weak to prevent the unscrupulous from covering up their tracks, the only way forward is self-regulation.

“It’s required,” says Lapping. “If banks don’t lend responsibly in South Africa, for example, you’re going to have millions of people over-indebted and the government is going to react with a tax on this or a ban on lending that. That’s why you’ve got to be responsible rather than just selling debt or selling credit to people that may not be in their best interest.

“It comes down to treating people fairly. If you look at the asset management industry, with different fee structures, and different fee disclosures, it has come a very long way over the last 20 years. Now you put as much knowledge in the hands of the customer as you possibly can, so they can make an informed decision.”

Fair treatment is also part and parcel of sustainability, says Lanning: “Whenever we invest in a business, it’s got to be sustainable. You can’t invest in a company that is doing something unsustainable in the hope that they won’t get caught. For example, we invested in a company called Transaction Capital that has a business called SA Taxi, which lends mainly to taxi drivers. Last year, taxi drivers protested that the rates were exhorbitant – so our sustainability office spent a lot of time looking whether it’s sustainable to lend to taxi drivers like this. We found out that SA Taxi is actually providing a very useful service because these taxi drivers couldn’t get finance elsewhere. SA Taxi looks at the driver’s proposed route and the state of their finances before lending the money for a taxi. This allows tens of thousands of people to establish micro-enterprises they wouldn’t otherwise have had, so it’s a net win for society.”

The investigation into the taxi industry also revealed certain types of harmful behaviour, such as dealerships forcing taxi people to buy their highly sought-after Toyotas with expensive accessories that had no particular value to add to the taxi drivers’ business model. Stopping this practice also amounted to a net win for the taxi industry and society. Clearly, where five years ago “nobody had a sustainability person”, sustainability has become of critical importance within to the financial services sector and society as a whole. At the end of the day, though, it’s a matter of common sense.

“We’re not trying to be vigilantes,” concludes Lanning. “We’re just trying to make sure that the companies we have invested in are behaving in a responsible manner, which is in their long-term good.”

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Issue 72