Profits or Ethics | John Howchin

Are there unethical companies, or economic sectors altogether?  Is the ethical choice down to the producer or the consumer?  In this episode, we tackle the thorny issue of morality in investment decisions.

We discuss with John Howchin, Secretary General of the Council on Ethics for the Swedish National Pension Funds.  His job is to discern good from bad - and there are billions of dollars at stake.

***

Highgrade is a not-for-profit organisation that produces interviews and documentaries that identify, capture and disseminate analysis and insights in the field of natural resources and social progress.

Our mission is to provide open and free access to specialist knowledge and to disseminate good practice and innovation in this field. See www.highgrade.media for our portfolio of published material.

With support from the German Federal Ministry for Economic Cooperation and Development, through BGR, and the Inter-American Development Bank.

***

Follow us on social media for daily insights and behind the scenes moments:

Twitter
LinkedIn

Transcript

Åsa Borssén: 
Is money bad? Are investors evil? Can a company be unethical – or are there unethical sectors altogether? Today we tackle the thorny issue of morality in investment choices. I'm your host Åsa Borssén, and this is Highgrade,

Åsa Borssén: 
Welcome to Highgrade and this Natural Resources Podcast. Emmanuel Kant postulated that the only thing we can judge is intention. True goodwill is good, regardless of the outcome. A contrasting philosophical view however, contests that results matter most. In that sense, the right thing to do is what effectively leads to the greatest good. I'm here with John Howchin, Secretary General of the Council on Ethics for the Swedish National Pension Funds. His job is to discern good from bad. And there are billions of dollars at stake. John, thank you for joining me.

John Howchin:  
Thank you. Thank you for having me.

Åsa Borssén: 
We are going to talk about investments. But your background is actually in environmental science and human ecology. Quite different, isn't it?

John Howchin:  
Yeah, well, quite honestly, I have a background in heavy industry. I grew up in Västerås, which is a town outside Stockholm, and I grew up in a company called ABB. My dad, who's your typical Australian, he moved to Sweden, before I was born, and he came from the steel industry. So I have a long history of really heavy industry. But like many Swedes, I got involved in the environmental movement in the 1980s when I was young, and I travelled the world, I travelled China in the early 90s. And I came back to my mother and I said, look, I'm not going to do electrical engineering, I'm not going to work for ABB I'm going to do, I'm going to do sustainability. And this was 1991. She said, you're never going to get a job, she said, and I said, well, I'm going to do sustainability. This is what I'm going to do. So it was a bit of a rocky road to find that way. Luckily, ABB pulled me back in the late 1990s when I was studying. And during one of the meetings with ABB I was doing my master thesis at ABB, we were requested by one of the institutional investors called Storebrand, who'd set up a sustainability fund and picking the best companies in the world to that sustainability fund in the 1990s. And I thought, Oh, this is interesting. It was the only time I saw ABB being a bit nervous. So I decided to join the financial markets and to join the financial institutions to see what we could develop within that framework.

Åsa Borssén: 
And you very early on were driven to evaluate company's performance sort of beyond profit. Tell us about the green index.

John Howchin:  
I left ABB and I co-founded a company called Green Index. They were setting up the first climate change index in the world together with the Swedish insurance company Folksam. So we were asking all the companies on the Stock Exchange and this is 1999 2000 to disclose all their carbon data, and it was the predecessor to what today is known as the Carbon Disclosure Project. And obviously this was quite controversial. There was a lot of criticism, a lot of discussions regarding this disclosure request. But we learned a lot and I think 20 years on, I mean today every company is disclosing their carbon data and footprint and transition plans and you have it. So it's been a long ride. And since then, I've continued in different roles to work with tools how to evaluate good companies, in terms of responsibility and sustainability and not so good companies in terms of responsibility and sustainability.

Åsa Borssén:  
Let's talk more generally about the role of companies in society. Some segments of society they often blame the world's problem on the greed of the private sector. Are companies evil or what should be the role of companies in society?

John Howchin:  
No, I don't think companies are evil companies. Companies are there to perform a special service, be it producing a, a physical product or to give a service to different parts of society. If you use the terminology of physics, it's a function. And we can decide whether that function behaves in a better way, or in a slightly worse way. And I think that's basically what I spent my life trying to do. So no, I don't think there are any evil companies. I think there are companies that do better. And I think there's companies that could do better.

Åsa Borssén: 
So not evil, but what about ethics? Are they're intrinsically unethical sectors?

John Howchin:  
I think ethics are complicated. But I mean, basically, if you look at the world, I mean, it's a global marketplace we live in. And the decision on what is allowed on the global marketplace, if we speak generally about legal things, we're not talking about the illegal sectors. I mean, that's decided, if you look at the Swedish National Pension Funds that I operate with now with the Council on Ethics, I mean, that's basically decided by the Government of Sweden, what kind of products we allow in Sweden, and what kind of products we don't allow in Sweden. And that, I think, to be honest, that more or less looks the same all over the world, there are differences coming to the forefront right now. For instance, like cannabis, is a typical topic, which is now legal in Canada and a few other places in the world. Whereas it's obviously illegal in Sweden, and there are conventions that describe them to be illegal as well, which we base our decisions on. So ethical products, unethical products, I think, I think the legal frameworks of the world decides that.

Åsa Borssén: 
Companies produce what people buy, should we blame producers or the buyers?

John Howchin: 
Well, I think companies produce what people want to buy. So I think we should maybe ask ourselves, and I think that discussion has been ongoing for quite a while: What do I want to buy? I mean, in essence, I think the sustainability movement that has grown rapidly over the last 20 years is very much focused on consumerism as well. And I think that will only continue. I mean, we're moving into a very complicated world, and it's going to be a very relevant discussion. You are what you consume. And I think that will continue. Absolutely.

Åsa Borssén: 
Let's move on and discuss your job at the Council on Ethics for the Swedish Pension Funds. What is the role of the Council?

John Howchin: 
So about the same time as we started Green Index, and we released the first climate change index in the world. The Swedish National Pension Funds, got new legislation. And they were told to take ethical and environmental consideration without infringing on the overarching goal of high returns. And this was 1999. So we developed the norms screening procedure, where we screen companies for norms breaches. And in the end, we're looking for breaches of conventions that Sweden has signed. That was the model we started building 20 years ago. You can either exclude companies based on that. The buffer funds that run the Council on Ethics decided that engagement was the key driver on this and have been engaging with companies where there is deemed to be norms breaches, you don't really need to use complicated terms like norms and conventions, we simply talk about 'incidents' and engage in 'incidents’. And 15 years ago, companies were a bit unaccustomed about investors calling them and talking about corruption, human rights breaches, environmental incidents, or accidents, more or less irresponsible behaviour, if you put it that way. I think these days, companies are much more aware of not only investors, but a large group of stakeholders, demand action and sort of an active approach by companies. But we still have a lot of work to do on a daily basis.

Åsa Borssén: 
And generally speaking, is there a trade-off between profits and ethics?

John Howchin: 
The conclusion I came to a long time ago is that I mean, where the world is heading and we're continuing down that path, you need to be really smart. You need to understand sustainability. You need to understand responsibility. And you need to understand the demands of all stakeholders and you need to put that compass in function to survive, and I honestly believe you're not going to be able to survive in the future, you're not going to be able to make money if you don't have a very good compass.

Åsa Borssén: 
The Norwegian Pension Fund provides a relevant reference point, famously, their approach is to exclude sectors or companies deemed unethical. For example, they walked away from oil quite recently. A little ironic for a major oil-producing nation, let me note. But this is not quite your approach, as you mentioned.

John Howchin: 
Yeah, I'm not sure. I worked for NBIM [ed: Norges Bank Investment Management], I helped them set this up many years ago, 10-11 years ago, it's a long time ago. I'm not sure they've walked away from oil, to be honest. And if we're going to stick to that discussion, just briefly, the discussion actually came from a sort of financial viewpoint that they had an overexposure to oil, since Norway, as a country, obviously still is an oil producer and have exposure as a risk to to oil. And then adding on to that the fund was also invested in oil companies, meaning they have quite a high-risk profile against oil. That was the background for the discussion for NBIM to put it that way. But generally, generally exclusions... And this is an ongoing discussion, you know, walk away, or trying to change to see to the company's walk the talk. I think we have a lot of sectors, especially now looking at the climate transition, and we're talking about the 'transition decade', the 2020s is going to be the 'transition decade' or word is the transition decades. To be truthful, I mean, we're going to need only for quite some time to come the global economy is so dependent on oil, it's going to take a long while to transition away from oil. So we need good oil companies, we need oil companies that that can manage both the transition, but also to get oil in a responsible way. So that's going to be challenging, and I think it's going to be a tough pill for a lot of stakeholders to swallow. I know my friends within the NGO sphere is quite upset about this. And they want, you know, exclude oil divest from oil you know, there's very strong divestment movements. But I think the reality of things is that we need to work with these oil companies for quite a while to come and I am and we are working closely with the oil companies on the transition plans. And just speaking today, Shell released its first sort of transition plan giving a bit more detail on how they plan to transition away from oil over the next 10-20 years. But obviously, it's going to be difficult for these companies to transition. Other oil companies have already started and you can see the oil companies buying large projects on wind and solar, etc, etc. but difficult and challenging discussions up and coming.

Åsa Borssén: 
And does this emphasis on dialogue risk to remain as an all talk no action approach?

John Howchin: 
Well I think I think we've proven over the years that we showcase results, what is produced, I think the challenge people when it comes to what is the result of an engagement, what is the result of a dialogue? Well, the usual output that I get is a new policy. It can be a policy on transition. It can be a policy on human rights, it can be a new policy on deforestation in the Amazon. And people they sort of expect more black and white things coming out of engagement. But I'm sorry, it's not really what we work with. I mean, we work with continual improvements. And I've been working with continual improvements for the last 25 years. And I can tell you, when I came back to ABB and I was dark green, I was as dark green as it could be in the mid 1990s. I had my climate depression in like the mid 1990s taking the train back from Hong Kong among many things I did. And they said, no, john, you're going to be working with continuous improvements. And I said no way, we need a revolution. But I've spent 25 years on continuous improvements, and I'm gonna spend my last 25 years on continuous improvements.

Åsa Borssén: 
I was about to say, does this come with age? Is it a wisdom thing?

John Howchin: 
I think unfortunately, and having done physics at university, I think the equation and let's be honest, the equation of 10 billion people on one planet is going to be challenging. I really understood that during my trip to China in the early 1990s. And look, there's not going to be any easy solutions. People I don't blame people. A lot of people want easy solutions on this but it's not going to be easy. It's it's the biggest challenge mankind has ever seen or ever had in front of them. And we need to we need to manage this wisely. So it's gonna be a very challenging time ahead of us.

***

Åsa Borssén:  
You are listening to the Natural Resources Podcast today exploring the difficult question of ethics in investments. John Howchin argues that separating right from wrong is not always black and white.

***

Åsa Borssén: 
I want to look at the extractives specifically. In 2019, your Council registered 15% of what you call incidents in the raw material sector. That seems really high given that there are so many sectors. Are the extractives particularly problematic?

John Howchin: 
I don't think so but it's a challenging sector, we all know that, because people can see, you get sort of you get something you can touch and feel, something you can blame. And obviously, I mean, I've met so many communities that live in the vicinity of mines. And they can feel they can see, and they can be critical of that mine. And I think that's that has always been the case. And that will always be the case. So you can't shy away from that. Having said that mining is a very important sector, we can't survive without mining. So there will always be a challenge in that situation.

Åsa Borssén: 
And you mentioned climate change and extractive and climate change are linked. We need mining for the transition to a low carbon future. Are you thinking differently about extractives today?

John Howchin: 
As you know, we've been we've invested in the tailings in mining initiative together with Adam Matthews at the Church of England Pensions Board. He and I've, we've been engaging heavily with the mining industry post the Brumadinho accident, and we've decided to set an agenda, you know, the 2030 agenda for mining, I think we need to have a thorough discussion. Because to your point, I mean, we're going to need quite a lot of new mines in order to produce the batteries, for instance, that are needed for the for the climate change transition, but it is a very challenging environment because you have a lot of NIMBY, not in my backyard. People are not very keen on on deep sea mining, to be honest. And it's a topic sort of running behind the scenes. And we simply need to become a lot smarter within mining, we need to develop new technologies we need to develop people mining. It's a challenging equation. Absolutely.

Åsa Borssén: 
And you mentioned the Brumadinho tailings dam collapse, which spurred global condemnation. Do the Pension Funds the Swedish Pension Funds have investments in Vale today?

John Howchin:  
No. So we were engaging quite extensively with Vale post the Mariana accident five years ago, which was obviously Samarco co-owned by BHP and Vale. And I was actually down in Brazil, to follow up with the local communities at Mariana. But also with Vale in Brazil, about three and a half years ago. So obviously, we were very disappointed. And I was personally extremely upset about the second accident in Brumadinho. I, I took it very personal. But it was also an insight, I think for many of us who are engaging with companies that we need to push, we need to push the agenda harder. And and that's why we set up the the investor tailings initiative.

Åsa Borssén:  
And that was an initiative rather than passing judgement a more hands-on approach to steer an entire industry. Are you expecting that you can educate an entire sector? And are you following the same approach in other sectors?

John Howchin: 
Let's put this straight once and for all, I don't think we educate anyone. What we've been doing when we engage, and this is the way we operate since day one, is that we take best practice. So you look at the sector and you say this is best practice, everybody can agree this company is doing best practice. And then then I ask the other companies in the sector, why aren't you doing this? Are you a worse company than this company? I don't see that. On the contrary, I see you doing a lot of great stuff. Why aren't you doing this? So So basically, best practice becomes the norm within that sector. So I don't think we're teaching anyone, we're just encouraging people to bring in best practice. And what we do as well is that we take this practice from other sectors because I operate across all the sectors. And then we bring in best practice from sector y into sector x. And we say look over here in sector y they're doing some really smart things on human rights and child labour for instance. You have the same issues within your sector. Why aren't you doing this? So no, I I'm actually quite humble and there's some really brilliant mining companies out there. There's some really brilliant people within mining doing some really brilliant stuff. We don't need to invent it anything we just need to push the agenda.

Åsa Borssén:  
And philosophically, to what extent do investment decisions by funds influence companies behaviour?

John Howchin: 
I think many pension funds, if they exclude a company, I think it hurts. I think it hurts within a company, I don't think. I mean, we're very cautious when it comes to the Council on excluding companies. But when we decided to exclude, we want it to be something that is noticed. Otherwise, I think you lose a bit of that edge with exclusion. That's our experience. And today, there's so many investors, I mean, if you look at the UN PRI, the principles for responsible investment when we started it back in 2006, there was 40-50 funds. Now we're over 3000 funds within the PRI. I think companies want to be perceived as the good guys, they want to be perceived as the leaders, not the laggards.

Åsa Borssén:  
And what does it take for a company to win your confidence back?

John Howchin: 
It differs, it differs on on the on the magnitude of what has happened. And I think as Vale can confess to, and we're having some really good discussions with Vale right now on what good look like. But I think when it comes to Vale, since a lot of trust was breached. And since we were heavily engaged with Vale before Brumadinho, I think we will need a lot of evidence to feel happy on that one. And we spoke to the communities around Mariana just yesterday, and just looking five years on Bento Rodrigues and the other villages around Mariana, where I went to see four years ago, they're still not rebuilt. I mean, it's quite ridiculous, I mean, Vale's making so much money, even though they had a heavy fine now. You just have to understand that you need to clean up the fundamentals, and you need to get going on there. I think Vale will, but it's taking all too much time. Whereas other companies in other cases are much quicker. And to the previous point, the reason why we don't exclude so many companies is because in engagement, the majority of companies actually do what we asked them to do. They sort out their businesses, before we reach the point of exclusion, which is the idea behind engagement.

Åsa Borssén: 
This has been a really interesting conversation. And before we go, let me go back to the overarching question on ethics. We've been discussing what is ethical and what is not? Does it change over time do you think?

John Howchin: 
I think norms are changing as we speak. I think norms have been changing when it comes to for instance, consumerism and how we live etc, etc. I think these changes are coming in, in certain parts of the world. I think some sectors are slowly being deemed unethical. I always say at the council we draw lines in the grey zones. That's what does our job doing. It's basically our, our mantra, we draw lines in grey zones. And I think that grey zone is changing, to be honest.

Åsa Borssén:  
But society I feel is becoming more black and white. We are in an era of drastic quick opinion making with social media being very reactive - almost almighty at times. Is there a risk of a witch hunting?

John Howchin: 
Absolutely. And we're back right now in a very sort of divest discussion, which I, I don't believe in, I don't think divestment works. And we need to breathe in, especially when it comes to the transition. Because right now the pendulum is swinging wildly in different directions, and it has for a while. A while back we were talking about ethanol being the saviour of everything. And it turned out well, it's not because we need to use all the farmland in the world to transition between oil and ethanol. And now batteries are all the rage. But in reality, I don't think everyone can run around with a electric car and 500 kilos of batteries in that car because it will have such an impact from the mining needed to get that so we need to be smarter and we need to be less black and white. We need to breathe in. A lot of my old friends within the environmental community are desperate. And the climate crisis is really challenging the way they perceive the world and you have Extinction Rebellion, and all these groups coming to the forefront. But the realities of things is that this system is just so big, so intrinsic to transition, this whole system is such a challenge.

Åsa Borssén: 
John, thank you very much for joining us in the grey zone today.

Åsa Borssén: 
And thank you for joining us. Here are my key takeaways from today's conversation: companies provide goods or services driven by consumer demand. By and large, whether these are ethical or not, is defined by the legal framework. But specific companies performances and operating standards is more open to interpretation. Funding is what keeps industries going. And John Howchin argues - whether it's mining or teddybears - that producers are increasingly responsive to pressure from investors - and in turn, from society more generally. 

This podcast was done with support from the German Federal Ministry for Economic Cooperation and Development through BGR and the Inter-American Development Bank. Do subscribe to our channel on your podcast platform to be the first to listen to our new episodes. Next time I'll be talking to Highgrade’s editors, discerning the main challenges faced by the natural resource sector in the years ahead. Until then, so long!