Investing for democracy

Both progressing and suffering, democracy inspires investment strategies based on exclusion, positive selection and shareholder engagement

Democracy is progressing in quantity, yet regressing in quality. In 2024, a record number of people worldwide participated in elections. However, according to The Global State of Democracy 2024 report, published by International IDEA, an intergovernmental organization based in Sweden, the quality of the democratic process is deteriorating. The decline is marked by setbacks in representation and rights, reduced voter turnout, rejection of results by losing candidates, and irregularities in the vote count. 

Advocates of democracy can be found across diverse spheres, including activists, politicians, academics, and cultural figures. Investors also play a role in this group, often promoting democratic principles through responsible investment, which typically encompasses three main approaches. The oldest, exclusion, involves avoiding investments that conflict with one’s values, such as arms manufacturing, coal production, or tobacco. In contrast, positive selection focuses on investing in initiatives deemed beneficial and ethical, such as renewable energy, nature conservation, or social housing. Finally, sustainable investment may take on the form of shareholder engagement, where investors acquire shares in companies and leverage their position to influence corporate practices from within.

Let's examine how these three approaches can be applied in finance to promote democracy. An example of exclusion is the LBRTY strategy proposed by the Franco-American asset manager TOBAM, which excludes companies based in non-democratic countries and favors those with the least exposure to such regimes. The underlying assumption is that exposure to authoritarian regimes poses a financial risk to be avoided. A similar approach is employed by the Democracy International Fund (DMCY), which “encourages capital flows to democracies, promoting democratic values globally”, and is based on the Democracy Index published by The Economist.

Investors who favour the second approach, positive selection, have opportunities to invest in themes and factors that promote democracy, such as education, economic development, women's rights, the fight against corruption and press freedom. For example, the Media Development Investment Fund (MDIF) invests in independent media where press freedom is under threat; the Dutch Pluralis focuses on similar efforts in Europe, while New Media Ventures operates from the USA.

Good practices

Peace is another investment theme closely linked to democracy, as documented by the Sustainable Finance Geneva website. In this context, Covalence has collaborated with the PeaceNexus foundation to identify best practices among a universe of multinational companies. Some examples include the following: in the Balkans in the 1990s, ABB worked to recruit Serbs, Kosovars and Bosnians to help rebuild the electrical infrastructure destroyed by the war; in 2008, Cisco initiated a program to strengthen the development of the Palestinian IT sector by creating jobs and start-ups; in 2014, in Cambodia, Puma, Gap, H&M and other companies pressured the government to respect trade union rights; in 2016, Adidas adopted a global policy to protect human rights defenders; in 2018, an election year in Kenya, Google launched a campaign to promote peace in the country.

Beyond exclusion and positive selection, shareholder engagement represents the third tool for advocates of sustainable investment. In Switzerland, the Ethos Foundation has been involved in an initiative combating corruption in the mining and oil sectors, while the Cadmos Peace European Engagement Fund fosters dialogue with European companies to encourage the promotion of peace.

In the United States, the non-profit organization As You Sow has been a dedicated shareholder since 1992. In 2019, it filed a resolution with Meta under the name #RebootFacebook, urging the company to improve moderation of illegal, hateful, or misleading content. A similar resolution was filed in 2020, which was accepted by 63% of independent shareholders, and 19.5% overall. In the future, we could see As You Sow file a comparable resolution, following Mark Zuckerberg’s announcement to abandon fact-checking procedures on Meta platforms.

Optimists and skeptics

These different responsible investment approaches attribute political responsibility to companies − a concept that was formalized by academics such as Andreas Georg Scherer (University of Zurich) and Guido Palazzo (University of Lausanne) in 2006 ; see also the University of Michigan Corporate Political Responsibility Taskforce, and Marie di Nardo's thesis, defended in 2024 at Aix-Marseille University. Among academics and beyond, optimists count on the private sector to contribute to the common good. Skeptics, however, fear the “privatization of democracy”. For their part, companies tend to minimize their political role by proclaiming their neutrality. Yet, as the examples above show, many of them are taking concrete action.

Companies − and the investors who support them − might draw inspiration from former Swiss Federal Councillor Micheline-Calmy Rey's book For Active Neutrality (in French), which describes a form of neutrality that is compatible with international cooperation, peace-building, and solidarity. By integrating both autonomy and participation, this concept offers a framework to navigate and adapt to “an increasingly dynamic and less secure global environment.”  At a time when democracy is both advancing and under threat, investors have economic and moral reasons to defend it.

This article has been originally published in French in Le Temps. The English version has been edited by Vera Kim. illuminem Voices is a democratic space presenting the thoughts and opinions of leading Sustainability & Energy writers, their opinions do not necessarily represent those of illuminem.