Values Based Investing

Recently, I decided to sell my shares of 3M. I’ve been shareholder for over a decade, which made the decision harder. This post describes my rationale towards making investment decisions based on non-financial (environmental, values) criteria. This post also provides an example of a portfolio faced with a similar decision-making process.

What is 3M?

3M is a multinational diversified manufacturing company whose products span a wide range of applications including adhesives, abrasives, laminates, and films. 3M serves customers in many industries including consumer (post-it notes), medical, building construction, and safety applications. Most of 3M’s products are related to things that “stick” and things that “prevent sticking”. The company produces many products that directly save people’s lives.

During my lifetime, 3M has been a profitable growing company that has consistently increased their dividends. But, over the past decade, the company has come under increasing criticism for their production of perfluorinated chemicals (“PFAS”). These chemicals are commonly referred to as “forever chemicals” since they don’t break down. Producing these chemicals is also risky to the environment.

My Investment Portfolio

How does my 3M investment fit within my wider portfolio?

How do I determine when to buy and sell?

An Investment Policy guides my investment decisions. My investment policy is grounded in a set of core values that inform my investment objectives and determine the investment strategies I undertake. My investment portfolio contains a mix of stocks, bonds, and real estate. I hold about 60 stocks in my portfolio which are diversified between Canadian & American companies. Each stock in my portfolio pays a dividend. Those dividends are used to supplement my personal income.

One of the values listed in my investment policy is support for “environmental sustainability”. In a broad sense, this means not borrowing from future generations to support current ones. I believe sustainability should include environmental, social, and economic sustainability. In practice, my portfolio uses a negative screen to exclude companies such as oil & gas producers. I also use my private foundation to directly support charitable initiatives encouraging environmental sustainability too.

Neither my personal stock portfolio nor my foundation’s investment portfolio contains so-called “impact” investments. All my capital aims to make economic profit (as I believe economic sustainability ultimately supports environmental sustainability).

How does 3M fit into my portfolio?

Historically, 3M was a good investment for me because its a profitable company producing useful products. I realized there were some environmental risks to the production of PFAS in the past, but as an individual investor, I didn’t really pay much attention to this issue. As time went on, I began hearing more about the public reaction to PFAS. I began noticing the politics of environmentalism shifting towards more aggressive action against companies producing PFAS.

Therefore, my opinion about 3M has changed. I decided the company would be under increasing political pressure to pay for the environmental damage it was doing, and this would be a drag on earnings and the ability of the company to grow at the same pace. From this perspective, I decided the company was no longer environmentally sustainable nor as economically sustainable for the same reason. At least, I believe there are better economic investments that I can make instead.

So, with my investment policy in mind, I recently sold my shares of 3M. The company represented less than 1% of my stock portfolio, so selling didn’t make much economic impact. I plan to re-invest the cash generated from the sale into a software company instead.

Another Perspective

Consider the perspective of a friend of mine. My friend’s portfolio contains $150 million worth of blue-chip American stocks. The portfolio was constructed a generation ago. Usually, one stock is sold or bought each year. So, the portfolio has a relatively low turnover. The decision about which stocks to choose is made by an investment manager with a bank owned brokerage.

My friend has an investment policy that also supports environmental sustainability. Even more explicitly than my own. Rather than simply excluding investments in companies that are not environmentally sustainable (as defined in his policy), my friend also subscribes to a shareholder activism service provided by SHARE Canada. This means that SHARE Canada will advocate for environmental policies with the companies in my friend’s portfolio on his behalf.

How should my friend approach his own investment in 3M considering the changing circumstances?

Making Decisions

Sometimes its difficult to make certain decisions on your own. Many people are indecisive. Especially when decisions impact your family. That’s why it helps to have a written Investment Policy that includes a description about how decisions are made. Defining a decision-making process in your investment policy can alleviate the responsibility of a single family member.

Another way to make investment decisions is by having an “investment committee”.

An investment committee can be composed of some family members and some outside advisors like your accountant, a representative of your family office, etc. Many family foundations that have lasted multiple generations have an investment committee and/or a board composed in this manner. Having an investment committee process to make investment decisions (broadly) can also help prepare for intergenerational wealth transfer as the committee members will be from various generations.

Not all investment decisions can be made by an investment manager you hire. Since, your investment manager may not be aware of the nuances of your opinions or provide you with a good forum for discussion. This is where an investment committee can be helpful.

Investment Manager

The investment manager my friend uses understands his portfolio objectives but is too busy with other clients to spend much time supervising the holdings in my friend’s portfolio.

When I mentioned 3M to my friend, he agreed with my rationale and wondered whether he should prompt his investment manager to sell his own shares too. My friend owns $2 million worth of 3M shares and it provides him with $90,000 of dividends each year. The portfolio is owned by my friend’s entire family, even though my friend is the sole financial decision maker.

How should my friend approach 3M in his own portfolio?

• Obviously, my friend is wealthy and doesn’t need the income (or the capital 3M represents for him).
• The cost base of my friend’s shares is very low, less than a few hundred thousand dollars since he has owned the shares for a long time. This means selling his shares would trigger capital gains tax.
• Although my friend employs an investment manager to pick his stocks, the manager hasn’t raised the issue of 3M with him. If my friend starts suggesting what to buy and sell, is that consistent with employing an investment manager altogether?
• Tax considerations, what about donating shares of 3M to add to a charitable endowment supporting environmental sustainability? (donate to eliminate)
• What about continuing to hold shares of 3M and pressuring the company (through SHARE Canada) to make changes to their environmental practices?

Shades of Grey

When you’re managing a portfolio of investments, you become faced with lots of decisions without clear “right” and “wrong” answers. The easy financial decisions don’t take up too much time, but the hard ones can really weigh on you. If you simply give all your wealth to charity, is that an abrogation of your responsibility? If you delegate responsibility, are you more exposed to fraud, conflicts of interest by your service providers, and “getting ripped off”? If you inherited your wealth from an entrepreneurial family member, do you have a responsibility to steward their capital in the best way possible?

I don’t believe there are universal “right” or “wrong” answers to these questions. What course you choose should be based on your own values, goals, and circumstances. A family office can help you frame choices, but ultimately you & your family need to make decisions (or rely on a clearly defined decision-making process). Part of the responsibility of managing wealth is making tough decisions.

A good family office will come to you with new ideas and highlight things you may have never been aware of. Like, the environmental impact of the holdings in your portfolio.

Our family office will raise topics for your consideration and make recommendations that align you’re your values & goals. We will talk through and work out the challenges that come with the responsibility of wealth including specific challenging decisions. We will also do the administrative tasks that accompany your decisions so that you can focus on the big picture and not get bogged down in paperwork. Let us know in the comments what you would do with your shares of 3M if you were my friend, or if you have suggestions for how to approach the problem described in this post.