The case against investing in gun companies rests on the basic principles of ESG, but also on the first purpose of an investment portfolio – making a maximum profit within a given risk framework. It is not the purpose of investing to change the world, teach it morality or foist any political dogma on its beneficiaries. It follows that an ESG policy should not be the consequence of the emotional or political preferences of those who manage or control the portfolio. It should be the logical consequence of risk management and return maximisation.
It is unclear what influence ESG has on returns. A number of studies point to a positive effect, some at a negative effect. What these studies have in common is that they use figures from a period in which ESG went from a fringe issue to an accepted mainstream requirement in most of the developed world. In other words, the benefits of ESG are slowly being priced in. If you are not taking ESG into account as an investor, you have probably missed a source of alpha from the return effect already. Today, it is safe to assume that ESG will, at a minimum, do no harm to your returns.
In the area of risk management, there are opportunities. The related risks come in two general classes. One is the image effect of investing in a company that gets embroiled in a scandal. As an investor, the media will tar you with the same brush as the offending company. This will have an effect on your clients or beneficiaries: they will trust you less. Trust is the oxygen of investors, so you need to protect it.
The other class of risk is regulatory. The enterprise you have invested in could suddenly have its product legislated to death, if that product comes to be seen as malevolent or having undesirable side effects. Think of chlorine in white paper, once a mainstream bleacher, today an impediment to paper exports.
ESG proponents typically think setting up a policy starts with exclusions and develops from a ‘best-in-class’ approach to impact investing. That makes exclusions a primitive policy. In practice, different situations call for a different approach. Some products, like tobacco, will do damage in all circumstances. Others, like oil, may or may not cause big environmental damage and are extremely useful in daily life. Just like exclusion makes sense for tobacco, best in class is called for in the case of oil. The other way around would be nonsensical.
Wrongheaded political arguments
The political discussion is centred in the US, where a powerful lobby argues against any restrictions on the distribution and possession of any firearm. Philosophically, it bases its position on historical traditions and the US constitution. Both pillars are wrong. The mythology of the Wild West sharpshooter does not stem from reality: early revolvers were so badly constructed they were as likely to explode in the hand of the user as to fire a bullet. Instead, circus-like Wild West shows performed in the cities created the story. As for the constitution, the Second Amendment is explicitly based on the need to maintain a militia, a volunteer army of amateurs, not on the need for hunting or private justice.
An important error of the lobby is that it equates its position with freedom. As stated in the declaration of human rights and citizens of 1789: my liberty ends and begins with the liberty of others. Individual liberty is relative and should be weighed against the rights and liberties of others.
Gun proponents will often defend their attachment to guns by pointing at the use of firearms to defend themselves against crime. The argument is revealing, in that it implicitly rejects the option to leave defense against crime, both before and after the crime is committed, to the police and court system. It condones punishment meted out by private individuals, thereby rejecting the rule of law, one of the basic pillars of democracy.
As long as the discussion remains emotional and dogmatic, the lobbyist’s position can be maintained, but it is so flawed that it is vulnerable to sudden collapse if that situation changes.
The case against handguns
In general, a number of the negative effects of handguns rest on the fact that they are difficult to aim with precision. Even training will not diminish this disadvantage by much.
Handguns (guns that may be operated with one hand, pistols) may be used by private individuals, the military and the police. We can be short about handguns in the military. Their only use is as a status symbol for officers. The military offers a plethora of much more effective alternatives.
Handguns are particularly ineffective in private hands. US statistics indicate that in the private sector, their main effect is to facilitate suicide and harm family members and bystanders in domestic accidents and social conflicts. Evidently, they are pointless and potentially counterproductive in a situation where the other party is armed with a more effective weapon. Handguns are useless for hunting.
That leaves the police. US statistics indicate that a large majority of handgun shots fired by police officers hit nothing in particular. A significant minority hurt the wrong person. Of the tiny minority of shots that hit the right person, many do not damage the part of the body targeted. The difference in target efficiency between police officers who re trained and those who are not is statistically irrelevant. Police have safer, more efficient alternatives, ranging from stun guns to automatic firearms.
In short, handguns do not solve any real-world problem. It is easy to live without any handguns at all.
Australia offers a case study for handgun control. While it started with few restrictions on handguns and a large mass of privately owned guns after the return of its soldiers from the First World War, the country soured on handguns after some bloody shooting sprees, known as the Port Arthur massacre, the Monash University shootings and the Sydney hostage crisis. These took place from 1996 to 2014. Tight gun laws were introduced in 1996. The other two shooting dramas led to further tightening. Political resistance was restricted to shooting and hunting enthusiasts and lobbyists. Vast numbers of weapons were ‘sold’ to the government (more than 1 million in 1996 alone, from a total population of about 15 million at the time) and Australians overwhelmingly support the present situation or want gun access tightened even further. This shows how an incident in a country can lead to a complete change that amounts to permanent loss of virtually the whole market. Moreover, it shows how popular support makes sure there is no way to backtrack. Change is in one direction only.
A risk profile of handgun producers
The list of the major handgun producers is short: Beretta, Browning, Colt, Glock, Remington, Sig Sauer, Smith & Wesson and Walther. It is, therefore, easy to ban them from an investment portfolio. All are subject to the risk of having their products virtually banned overnight, even in their home countries. Most have good name recognition. They are sensitive to becoming embroiled in scandals and dramas perpetrated with their products or even products of competitors, and to the risk that the negative effect of such scandals will spread to other products they make. None of them offers a return above average as a reward for running an extraordinary investment risk. That makes the decision simple.
Peter Kraneveld is international pension expert at PRIME and retired chief economist of PGGM.
