Tuesdays with Travis is a collection of monthly interviews with our data science lead, Travis Korte, that explores the complexities of expressing values through data.
All of us have values informed by the cultures we grow up in and the experiences that shape us. But challenges arise when we assume that our particular set of values is universal or objective.
In sustainable investing, applying local values to a global portfolio can have unforeseen and even counterproductive impacts. In this Tuesdays with Travis, we explore the culture-bound assumptions embedded in sustainable investment decisions and the ways that questioning these assumptions can help achieve greater impacts across global and emerging markets exposures.
Today we’re talking about the ways that cultural values can complicate an investor’s attempts to build a sustainable, global portfolio. That’s a big topic. Can you break that down for us?
It sounds obvious, but different cultures are different. People in different parts of the world have different ways of living, different ways of doing business, different standards of good behavior, and different metrics of success. In the same way that you can’t apply a one-size-fits-all approach to thinking about risk in different industries, you can’t just demand that people from one culture adopt the norms of another.
We’re assessing companies in all different countries on the issues we cover, but we want to be careful about asking global companies to adhere to a set of standards that were developed by, for, and in many cases representing the interests of companies in Western countries. How do we account for the fact that it’s harder to meet conventional sustainability criteria in some places than others?
These kinds of issues come up all the time and they pose ethical questions as well as practical ones. In general, companies that outperform on sustainability tend to outperform financially as well; for the moment, though, we can’t assume that a sustainability strategy that helps a company thrive in Western Europe will have the same effects in Southeast Asia. If we want to have truly global impacts, we need to be taking these kinds of factors into account.
Can you give us an example of how cultural differences manifest in sustainable investing data?
In Western countries, investors often take it as a negative sign if a group of companies own stock in one another — something called cross-shareholding — because it means ordinary shareholders get less control-for-their-buck than insiders. It’s never been widespread in the West, and in fact there are no companies in the S&P 500 that are currently doing it. But in Japan, there’s a common corporate structure called a keiretsu, which is exactly this type of setup: a group where companies hold mutual interests in one another. That’s just how business has historically worked in Japan. So when the largely Western sustainable investing community comes around complaining about cross-shareholding, you can imagine a lot of the Japanese business community doesn’t see what all the fuss is about. In the West, insider shareholders still have other mechanisms for consolidating power, so it’s not like Westerners really have the moral high ground.
Gender diversity is another tough case. The average S&P 500 company has a board of directors that’s about 20% women. But in East Asia and parts of Latin America, that number is closer to 0%. So even if investors think it’s both morally right and financially prudent for all boards to have high gender diversity, we still might not be accounting for the fact that companies in some countries will struggle with that target more than others. We could try to apply our diversity standards equally as strictly in South Korea or Mexico as we do in the U.S. and Western Europe, but if we did that we’d essentially just be flagging entire countries. If our goal is to encourage companies in those countries to embrace gender diversity, saying “everyone gets an F” probably isn’t an impactful approach.
Can’t we ask companies in these countries to change their behavior in the same way we’re asking Western companies to do?
We can certainly ask. But it’s important to realize that not everyone is starting from the same spot; companies in countries with different cultural traditions around sustainability may have a harder time adapting to certain behaviors. Part of what makes this all so hard to unravel is that we’re talking about power imbalance. You’ll notice that companies that get higher scores from sustainability data providers tend to be larger cap and from Western countries, and the companies that do worse tend to be smaller cap and from non-Western countries. That’s in part because prevailing standards of “good corporate behavior” are mostly based on ideas about big companies in Western countries. Everyone else has been made to adhere to their standards, even if they didn’t have a seat at the table when the standards were set.
You could argue that when a company voluntarily lists itself, the market will dictate best practices. Why should individual investors try to account for various cultural caveats?
I’m not sure I’d call being part of the global economic system “voluntary” for companies. If access to capital is tied to participation in a system whose rules are stacked against you, what choice do you have?
Western countries industrialized and grew and became wealthy because of their use of technologies like coal-fired power plants, which today we consider unsustainable. It’s like the developed countries climbed this ladder of unclean technologies and then pulled it up behind them. That can be confusing to companies in countries like China and India, which are developing now. “Now that you’ve become wealthy, all of a sudden it’s unsustainable for us to do so too?”
If it’s easy for us in the sustainable investing community to say coal-fired power plants are unsustainable, that’s partially because our livelihoods don’t depend on their short-term economic benefits. At Ethic, we pay a lot of attention to context like this because it shows how “impact” isn’t as clear-cut as we might think; how should we weigh a hundred more metric tons of carbon dioxide against the wellbeing of a town of coal miners in China?
Are certain values less imposing or more universal than others?
We’re all humans. Most of us, regardless of our background, have certain intuitions for what is and isn’t gray area. If there was a company that said “chemical weapons are part of our culture; don’t take that away from us,” we’d feel fine telling them to take a hike. But in general there’s more ambiguity than there is clarity.
It can get really murky when it comes to board diversity, for example. By default, we apply our standards universally — holding a South Korean company to the same standards that would apply to a German company, for example — but if the point of your investment is exposure in East Asia, then you might need to be more modest in your diversity goals, at least locally. We could help you identify the companies in the top 30% with respect to board diversity in the East Asian market, for example. Otherwise, you’d have no companies to work with.
How can investors identify [their own] cultural blind-spots? What can they do about it?
You’re already ahead of the game if you’ve started noticing yourself making these culture-bound assumptions. Maybe it’s some company characteristic you consider “objectively” good or bad, but that you realize might be a point of contention in another country. You can also start to question the extent to which your sustainability preferences might be making unreasonable demands.
Ultimately, being more thoughtful about different cultures means being more thoughtful about impact. Most of us, regardless of our cultural affiliations, probably all want a lot of similar outcomes — life expectancy should go up, maternal mortality should go down, human development index should go up — but the route to getting to those outcomes is where culture-bound assumptions can get in the way. You want to identify the goals, but you don’t necessarily want to be prescriptive about the methods. For example, it’s hard to conclusively say Japanese keiretsu companies are better or worse than Western companies that use other means to consolidate shareholder control. Not all the impacts we value have a predetermined path to them, so we can’t necessarily recommend some arbitrary Western business practices over some arbitrary non-Western business practices. But if we start our sustainability approach with the impacts we’re trying to advance, we can leave flexibility for different approaches to achieving those impacts.
- Sustainable investing standards are often oriented toward companies in Western countries.
- Different cultures can have different sets of best practices around sustainability issues.
- Applying the same sustainability criteria with equal strictness across different cultural contexts can flag entire regions and reshape portfolio exposures.
- Investors should start with the impacts you’re trying to advance and leave flexibility for different approaches in achieving those impacts.