A recent report says Vancity Investment Management is divesting its shares from two socially responsible investment funds (it also advises on three of the funds) in beleaguered oil pipeline company Enbridge. On the surface at least, the story is a good example of the connection between ethics and business.
You’ll recall that Enbridge is the same company that has repeatedly made the news over the last few years because of leaks in its pipelines. It has also faced opposition from First Nations and environmental groups with regard to its planned pipeline across northern Alberta and British Columbia. The combination of errors in its past and risks in its future is apparently just too much for Vancity, and perhaps for other socially- and environmentally-conscious investors.
It’s often pointed out that, in order to stay in business, a company needs to maintain its ‘social license to operate.’ But more specifically it needs to retain the goodwill of key stakeholders, and investors are very high on that list.
But of course, investors can turn on a company for all kinds of reasons; the perception that the company isn’t doing well socially or environmentally (or more generally, ethically) is just one. Even if we limit ourselves to “social” reasons, there are those that have broad social consensus (e.g., child labour) and others that are socially divisive (e.g., contributions to pro-choice or anti-abortion groups).
This points to an interesting question about the obligation that managers and boards have to manage risk. It is increasingly clear that the obligation to manage risk includes not just financial risk, but just about any risk to which the company might be subject. That includes environmental risks and reputational risks. Understandably, the two are intertwined. According to the Vancity story, another company, Northwest & Ethical Investments LP, has expressed concern about Enbridge not only for the environmental risks its pipeline poses, but because of the risk posed by opposition.
Should Enbridge (and its shareholders) be concerned about the Vancity divestment? That’s unclear. At about $2.5 million, the divestment itself doesn’t sound catastrophic but things could change if other investors follow suit. How likely that might be is also unclear. The interesting question is which kind of worry is more likely contagious: worries over environmental risks (and financial risks that go with those) or worries over risks of opposition.
In the end, it may not matter much. As I argued in “Wanted: High-efficiency oil & gas companies,” oil companies need to do a better job of managing environmental risks. If they can succeed at that, they may well see the risks of social opposition melt away at the same time.