On Friday, US healthcare giant Johnson & Johnson saw close to £32 billion wiped off of its market value as shares tumbled 10 per cent on a Reuters report that revealed it has known that its baby powder contains asbestos for more than ten years.
The revelation comes as the company fights 11,700 individual legal cases brought by defendants claiming that the company’s products have caused their cancers, which could cost the firm tens of billions of dollars in reparations.
On Wednesday, one such case was upheld by a court in Missouri, which ordered Johnson & Johnson to pay £3.7 billion to 22 women who blame their ovarian cancer on the asbestos in its talcum powder – one of the largest personal injury payouts on record.
This has caused shares to slide a further 3 per cent, with the firm now trading at its lowest level since May 2017, and falling.
Clearcut need for ESG
The case of Johnson & Johnson, much like that of Volkswagen and BP before it, is a horrifying example of corporate evil in which, once again, we see a powerful conglomerate put profit before the very lives of its customers and the global community.
What is more, it powerfully underlines the need for strong and effective environmental, social and governance (ESG) screening across the investment industry.
Few investors would condone a company knowingly exposing babies to cancer
The moral case is clear: there are very few investors – public or private – that would condone the actions of a company knowingly exposing babies to cancer. Indeed, if surveys around ethical and sustainable investing are to be believed, given the choice most private individuals would sell out of such a stock immediately.
Moreover, as the on-going sell-off at Johnson & Johnson shows, there is also a huge financial cost to owning corrupt companies.
Volkswagen’s shares, for example remain 40 per cent below the level they were at in 2015 before it was revealed the car maker had been cheating on emissions reports, while BP’s are still 20 per cent below where they were in 2010 when the firm unleashed the biggest oil spill in marine history into the Gulf of Mexico.
Fund managers that invest in corrupt companies are putting their investors at risk
As bodies like the UK’s pensions regulator are slowly realising, fund managers and insurers that plough money into companies like these are putting their investors at needless risk, squandering their savings, while also contributing to significant environmental and social harm.
These are the sorts of risks that have long been recognised by active sustainable and ethical investment managers who – if they are worth their salt – work hard to ensure such companies do not make it into their investors’ portfolios.
In the sustainable investment category, a company like Johnson & Johnson is unlikely to even be considered for inclusion, with its activities and products contributing little, if anything, to global sustainable development.
Mike Appleby, investment manager on the Liontrust Sustainable Future team, comments:
“We don’t invest in Johnson & Johnson. This isn’t because we have analysed the company and come up with known red flags and decided to avoid it, but simply as a result of us finding other better ideas exposed to our positive investment themes, which are linked to the UN Sustainable Development Goals.”
It is up to managers to keep a close eye on the activities of invested companies
In the case of ethical investing – where a portfolio is built by screening out companies involved in traditionally ‘immoral’ industries like tobacco, arms and pornography – Johnson & Johnson could easily make the grade, and so it is up to managers to keep a close eye on the activities of invested companies.
Neville White, head of SRI policy and research at ethical investment house EdenTree Investment Management says the firm sold out of Johnson & Johnson this year:
“Johnson & Johnson had been held in our Amity screened funds for some time, but as part of our on-going due diligence we perceived growing risk from controversies and litigation and so, having flagged the stock as among our highest for ethical risk, sold out in July 2018.”
Not all ethical or ESG investment managers, though, are so conscientious. Indeed, a quick scan of funds labelling themselves either ethical or ESG reveals ten that have Johnson & Johnson as one of their top ten holdings.
In the pension fund space these are: B&CE The People’s Pension Shariah, L&G Global Ethical Equity Index and Zurich Ethical.
Passive funds track indices with no regular oversight – so they can’t swerve environmental or social disasters
As well as holding Johnson & Johnson within the top four, together these funds also invest in Exxon Mobil, Facebook, Royal Dutch Shell, Nestle and Pfizer; all of which boast their own records of environmental and/or social outrages.
Similarly, seven ‘ethical’ or ‘ESG’ global exchange traded funds (ETFs) have Johnson & Johnson as a top ten holding. These are:
- Deutsche ESG MSCI USA UCITS ETF
- iShares MSCI USA ESG Screened UCITS ETF
- iShares MSCI USA Islamic UCITS ETF
- iShares MSCI World ESG Screened UCITS ETF
- iShares – MSCI World Islamic UCITS ETF
- Vanguard Ethically Conscious International Shares Index ETF
- Xtrackers ESG MSCI World UCITS ETF
While the funds range in size and scope, from £98 million (iShares MSCI World Islamic) of assets under management to just £1.2 million (Vanguard), what they all have in common is that they are passive index trackers.
Unlike the active funds run by human managers at Liontrust or Edentree, these funds passively track indices with no regular oversight – meaning they are unable to spot and steer away from environmental or social disasters.
Truly responsible investment involves rigorous research, management and oversight
Coming at a time when swathes of passive ESG, ethical and ‘socially responsible’ funds are being launched into the UK market, this is a timely reminder of the limitations of passive investment.
Truly responsible, sustainable or ethical investment involves rigorous research, management and oversight: it is not something that can be slapped together on the hoof by excluding a few “sin stocks” from an index.
And so, if we as investors truly care about keeping our money away from companies knowingly exposing babies to carcinogens, we’ll need to swerve the cheap passive pretenders and pay a few more basis points for responsible, active management.