Should you ever wake up in the night thinking the world is a big, screwed-up mess and you’d rather not add to it anymore than you already do1, then know that you are not alone.
SRI investing – variously known as Socially Responsible Investing or Sustainable, Responsible, Impact Investing – is a growing market movement, enabling investors to put their pounds into the collection boxes of the good versus the G-strings of the bad.
By choosing an SRI-themed fund,2 you are buying into firms with a positive environmental, social and corporate governance (ESG) agenda [Caveat Alert] while steering clear of sleazy capitalists who profit from gambling, porn, booze, fags, guns, and generally exploiting the planet and its denizens [Caveat Alert].
Hold up. What’s all this ‘Caveat Alert’ business?
Well, it turns out that investing on behalf of your conscience is no simple matter. It requires you (or someone else) to make active choices about what counts as vice or virtue.
- Do you think genetic engineering is bad? Nuclear energy? Alcohol? Soft drinks? Some SRI funds screen out these industries. Others don’t.
- Do you want your fund to just avoid the bad (called negative screening) or do you want to reward the good (positive screening)?
- Is environmental sustainability your banner cry, or do you want to invest according to your faith?
And what about a firm that’s good and bad? Say a company is really good at employing a diverse workforce with generous pay packages – but really bad at resisting the temptation to strip-mine virgin rainforests?
Do you want your fund to be an active shareholder that lobbies management to work harder at not screwing over their workforce, employing children, contaminating the water supply, avoiding tax, corrupting local politicians…
SRI is a broad church. And you can just invest in a fund that slaps a friendly label on – like an egg box that claims its chickens are deeply-loved – or you can do some digging, and find out who you’re actually supporting.
Choosing SRI funds
Fortunately there are some people out there who can help you navigate the moral maze.
At the very simplest level you can stick ‘SRI’ into Morningstar’s search box3 to dial up a list of funds and ETFs designated ‘SRI’. You can then invest in a vehicle that’s a sweet-smelling version of one of your regular asset allocation picks.
For example, you’d stop stinking up the place with a standard global equity fund – neck deep in fossil fuels, cluster bombs, and god knows what else – and replace it with a global equity SRI fund instead.
Job done. It only remains to celebrate with an Uber ride down the pub, puff on a big Cuban and test-fire some nukes using a coal-powered launch system.
Alternatively, you can refine your choice by paying some attention to Morningstar’s Sustainability Rating and Sustainability Score. These metrics are meant to indicate how well the companies in a fund walk the ESG walk in comparison to the holdings in similar funds.
The Sustainability Rating can be found on a fund’s overview page on Morningstar, and as many as five globes can be awarded for good behaviour. The globes look like this:
But how do you know whether companies really are playing nice? Well, let’s just say the level of scrutiny is not going to be up there with St Peter at the Pearly Gates or even Santa’s Elf On A Shelf.
Like buying Fairtrade chocolate, a lot must be taken on trust.
For example, companies are partly ranked according to their own documentation of their ESG policies. Performance measures like absenteeism and staff turnover play into their social rating. Carbon footprint can feed into the environmental side. The more you think about it, the more you realise that independently verifying this data must be a nightmare.
It’s also interesting to note that the company – Sustainalytics – whose data underpins the ratings does not seem to win many rave reviews from its former employees on GlassDoor.
That said, the metric enables us to see that, for example, the iShares MSCI Emerging Markets SRI ETF gets a Sustainability Rating of five globes. That puts it in the top 10% of funds for ESG in Morningstar’s Global Emerging Market Equity category.
Meanwhile, iShares Core MSCI Emerging Markets IMI ETF only gets two globes. That puts it in the bottom third of the Global Emerging Market Equity category.
You’ll notice the latter ETF is not SRI-focussed. Yes, Morningstar’s Sustainability Rating enables you to gauge the ethical tilt of funds that are not explicitly SRI. That’s handy because it allows us to cast our net wider. We can try to still invest in the most diversified funds while balancing our desire to make a difference.
Also note that all this globage tells us nothing about how funds compare against any other category. Five globes in Emerging Markets may not be as virtuous as three globes for a Clean Energy fund in the Equity Alternative Energy category, for instance.
And if a fund doesn’t notch a single globe then it doesn’t mean you’re investing in a bunch of companies with Sith Lords for CEOs. It simply means there isn’t enough data to generate a meaningful rating.
The long morality tail
If you want to shine a brighter light on your options then try Fund EcoMarket. Its search tool helps you find funds on all points of the moral compass (except the one that points down).
Tick a box if you want to tilt towards:
- Social or green themes
- Animal testing policies
- Oil, gas, and coal exclusion
- Shareholder activism
- Voting record transparency
These are just examples of the site’s breadth. It does an excellent job of breaking down and explaining the many granules of SRI.
So who are the moral guardians behind Fund EcoMarket? You can read all about them, but in short they are sponsored by wealth managers and fund providers who offer SRI services. Which makes sense because it’s not easy to research SRI investments right now. They freely admit they supply information as it’s provided by the product providers and I didn’t feel unduly funneled towards the sponsors’ products. In fact it’s the most useful UK SRI site I’ve found so far.
Fund EcoMarket’s search tool enables you to tick for index funds but it doesn’t currently include ETFs. As in the amoral fund space, SRI funds are dominated by active management, which is fine if you personally accept that’s a price worth paying.
Passive investors will be better served using the Morningstar link above and justETF’s search tool with the social / environmental dropdown activated.
Here you can pour over specialised trackers like the Amundi MSCI World Low Carbon ETF or the iShares Dow Jones Global Sustainability Screened ETF. Remember that niche ETFs are risky because they are liable to concentrate on a narrow range of companies or sectors. They probably shouldn’t be more than a 5-10% complement to your portfolio and are not a replacement for broader asset classes.
The US market tends to innovate at a faster pace, so if you’re truly passionate about certain causes then you could research American products like the SDPR SSGA Gender Diversity Index ETF via platforms such as DeGiro or Interactive Brokers.
But be aware that going off the beaten path can take you deep into the woods and requires a level of research way beyond the scope of this article.
The wages of sin
I’ve deliberately left to last the really big question: Whether good can triumph over evil in a, y’know, Earthly riches sense.
Surely the Dark Side is the quick and easy path to financial freedom?
Well, unless the Minions of Evil are the ones doing all the research it’s impossible to give you a straight answer. The literature cuts both ways and much depends on how you mine the data. Sometimes the saints can beat the sinners, but the most likely story according to financial theory is articulated by the renowned trio of Dimson, Marsh, and Staunton from the London Business School.
These academics reviewed several SRI studies for their Credit Suisse Global Investment Returns Yearbook 2015 and declared:
We show in this article that ‘sin’ can pay, not least because those choosing to exit ‘sinful’ stocks can cause them to offer higher returns to those less troubled by ethical considerations.
However, the expected financial impact of modest exclusions is generally small. We also provide evidence that corporate engagement can pay, whether the focus is on environmental and social issues or on corporate governance.
You see, as with any risky investment, if enough investors shun a firm you can expect its share price to fall below its fundamental value. This sets the stage for future excess returns. Even if the saintly investors continue to reject vice, Dimson, Marsh, and Staunton theorise that:
If the ‘sin’ discount stays constant, the expected capital gain is the same for sin and non-sin stocks: the excess returns to sin stocks should then come in the form of higher dividends over time.
In other words, you pay a lower price for the dividends of sin which should improve your returns versus less dubious shares.
Yet even those who pursue Earthly pleasures should know that shareholders can drive returns by forcing management to clean up. Improved corporate behaviour lowers perceived risks, which means that reformed companies:
[Are] likely to attract additional investors, avoid environmental and social mishaps, and sell at a higher multiple.
Which according to Dimson, Marsh, and Staunton could lead to an interesting SRI strategy:
A large investor can generate continuing outperformance by buying non-responsible companies and turning them into more responsible businesses. After they have been cleaned up, the shares may then be sold at a price that reflects the accomplishments of the activist.
Whether or not you think this motive springs from the purest of ideals, it does suggest that SRI investing can make a positive difference to the world without leaving you poor as a church mouse.
Can you put a price on your principles?
Just in case you think all this socially responsible stuff is a bunch of hippy crap, Morningstar quotes figures that estimate 30% of global managed assets were devoted to sustainable investing in 2014.4
It’s an area we’ve been asked to write more about by dozens of readers over the years, too.
The sight of human beings coming together to change the world is truly moving. It may be slow, it may be imperfect, but it is happening.
However, the purpose of this piece is not for me to tell you what to do. It’s to tell you what you can do.
Take it steady,
The Accumulator
P.S. This SRI business has more labels than a Formula One driver’s jumpsuit. Here’s an non-exhaustive list. Please add any more you find in the comments below!
-
- Social investing
- Responsible investing
- Sustainable investing
- Green investing
- Ethical investing
- Impact investing
- Socially conscious investing
- Socially responsible investing
- Earth Mother investing
(I may have made one of these up).
- …living your life of Western decadence at the nexus of a vast network of exploitation and inequity just so you can buy cheap trainers and neck chicken McNuggets in front of a giant TV that broadcasts more colours than you can actually see! AAAAARGH! [*Blows brains out*] [↩]
- I’m going to use the term ‘fund’ as a catch all for diversified collective investment vehicles including ETFs and Investment Trusts, but not just passive products, throughout this piece. [↩]
- Morningstar is a reputable financial data firm that provides useful tools for finding funds. [↩]
- See page 42. [↩]
This is my own take so absolutely don’t believe I’m stating gospel here. I think many will be happy to pile in SRIs with decent returns.
I have just started my investing journey (helped by this site, with thanks) and as a tediously vegan, ethically conscious SJW with a libertarian streak (I’m weird) I spent many hours researching the best funds to meet my needs…and a finding the same issues of high fees and wobbly returns.
And as alluded to in the article, most importantly, I couldn’t find one that really met what I was looking for. I’m not that fussed about whether you exclude drink, tobacco, porn, gambling or nuclear power but I do care if you feel the need to squirt your potions into a monkey’s eye or build a weapon designed to butcher your fellow humans.
I had a go at the site but still wasn’t 100% happy.
You think you’ve picked the right one then you see they invest in Apple, Sony or GlaxoSmithKline, and so on. You’ll find arguments against everything and in 40 years you’ll be sat with your money in the cupboard next to the organic lentils earning nothing.
I holding my nose and am piling into a cheap global tracker hoping my dosh would go to enough good places and that I do enough good deeds in my life to make up for it!
I’m not ruling it out completely but I just need to get in the game first.
Thanks, interesting article.
This is something that worries me but, I’m ashamed to say, not so much that I stump up for higher costs.
If I were going to accept higher costs, I’d want to make my own choices of what’s OK to invest in. I think what I’m looking for is some automated trading platform where I set the rules and the cost is at Vanguard fund levels ..
As an IFA that has been involved in this area since 1990, I think that “SRI” is becoming rather an anachronism as shorthand nowadays! I much prefer “Values-Based Investing” as, of course, we all have (very) different values when it comes to where our money is invested. Many don’t care, but I have found that over the last few years, more and more of my clients have at least some detailed “values” as far as where and how they invest.
It’s quite a challenge, sometimes, to facilitate what I call “dark” (i.e. very strict) values as the investment universe is much reduced and the risk is therefore increased. Most people I deal with are pragmatists or “pale” V-B investors which very much opens up the investing universe. Whilst it is good to see an increase in the index fund choices in this area, it remains dominated by active funds and, I think, this is likely to continue.
About 22 years ago I was briefly involved with a well-known, but long gone, “ethical” IFA who were opportunists and geared up to extract the maximum commissions they could from “cardigan-wearing Guardian readers” (quote from the then boss). Today, the specialist practitioners are very good (a “heads up” to Rathbone Greenbank in Bristol) but watch out for high recurring fees.
Thank God that people invested in the armaments maker Vickers-Armstrongs and Hawker Siddeley Aircraft in the 20s and 30s. Their products, the Supermarine Spitfire and the Hawker Hurricane, saved Western Civilisation over the course of a few months in 1940.
“Dearieme” That really isn’t the point. No-one is telling you how to invest your money, not at all, and there is some anecdotal evidence that so-called “black” investing or “sin” investing might have been a good long-term choice, but it is all about individual discretion. For example, I have a few Quakers as clients and they are very interested in V-B Investing, as you might expect. Years ago I had a client who was only interested in making sure that none of here money would be invested in stocks of a company that might have even a peripheral involvement in abortion.
V-B Investing can embrace alternative energy, clean water technology, healthcare, timber, etc. etc. It can also embrace rather more well-known sectors, too.
You pay your money and you make your choice!
@Mark — While you’re reading, I’ve sent you a couple of emails over the past 12 months about potentially contributing to the site (a sort of good guy IFA is the way I’m thinking 😉 ) and don’t think I’ve heard back. No worries if it’s not of interest but just want to check the emails made it through! Perhaps drop me a line via the Contact box top right if of interest. (I haven’t asked any other IFAs about this ever, but I’ve been following your comments across the Web for years now and think there might be some mutual value in it…) Cheers!
At EQ Investors we assess funds against 41 criteria for social and environmental impact in building our Positive Impact Portfolios. As well as avoiding harmful investments we look for funds which aim to make a positive contribution to society or the environment, alongside an attractive financial return.
Our portfolios can be used as a stand-alone investment solution for those who view social and environmental considerations as paramount to their investment objectives, or as separate specialist portfolios. To find out more, please visit: https://eqinvestors.co.uk/positive-impact/
RISK WARNING: the value of investments can fall as well as rise, so you may get back less than you originally invested.
The desire of investors for new fads is eternal.
One consideration that helps me is this: when you buy a tracker, it invests only in second-hand goods, i.e. existing shares, rather than new issues (IPOs). Therefore, you are not contributing investment capital to any company with which you disagree. What you are doing is benefiting from the activities, good and bad, of that company via the dividend. However, any benefit from shares with which you disagree can be neutralised by giving a proportionate amount to charity.
Whilst I can understand some sceptical response to V-B Investment, it’s by no means a new phenomenon. The then Friends Provident launched their “Stewardship” unit trust as long ago as June 1984 and it is still around today under the F&C brand. I remember that many IFA’s called it the “Brazil” fund ‘cos they thought it was nuts!
A few years later Jupiter launched their Ecology fund – a kind of “green technology” pioneer and today there is lots of choice in the V-B arena from the likes of Quilter Cheviot, Kames, WHEB, Henderson, Standard Life, Rathbone, Royal London, etc. These are all “active” managers. I note that UBS have a pair of V-B ETF’s and the sector (“thematic” sector?) has grown very fast. In the USA it is very substantial.
My thoughts are along the lines of I always ask if an investor has any concerns as to where or what in their money is invested and my role is to facilitate that as best I can from the range of tools available. There are plenty of people who have never even been asked the question by an IFA but, in my experience, when they are asked, their response can be very interesting and leads to a better level of client engagement with their pension, ISA or other investment.
You have to remember that not everyone wishes to invest in the likes of tobacco stocks, despite their historical yield characteristics, or would prefer to invest in battery technology rather than oils, for example. Such investors are sometimes driven by belief systems, religious or otherwise, others are agnostics, just interested in obtaining decent returns without compromising their ideals too much.
Have a look at uksif.org and see what is available!
This is the best post I’ve seen on Monevator to date. I am delighted to perceive a change in tone from the post on Nest a few months back. I echo some of the concerns that others raise, especially the heavy bias to the crazy valued tech stocks in most SRI filtered ETFs, but strategies for profitably investing in stuff that won’t harm my 2 month old son and his generation deserve so much more space.
@Mark Meldon: I would love to see you join the team here at Monevator to expand on values based investing.
To play Devil’s Advocate, would you do more good investing in an all market tracker, and running a hypothetical SRI portfolio in parallel. Then note your differences in returns through the wages of sin/lower charges, and gift aid the excess to the charity of your choice?
@William III — Glad you liked the piece, but no change in tone. Different author, different goal! 🙂
The Nest piece was an opinion piece. I still think Nest shouldn’t be using other people’s money to make their own personal judgement calls unless they’re confident those people are informed and on-board with their decisions. (I have no problem with people investing their own money however they like, within the law, provided they know what they’re doing). It wasn’t (isn’t) clear to me that was the case with the Nest development, given it’s a default pension for likely disinterested and less sophisticated investors.
But regardless, this article is explaining *how* to research some of the things that matter to you as an individual, not what those things should be.
These are complex issues, as you’ll obviously appreciate. While callbacks to the Second World War military aren’t very convincing to me, more nuanced examples abound. An SRI-investor of a (hypothetical) pre-oil era deciding that the new fuel is too explosive and potentially polluting — and perhaps destabilizing for the existing coal industry and its millions of employees — also misses out on the Green Revolution (in agriculture) as well as much of 20th Century culture.
Similarly, there are arguments (that I don’t subscribe to, personally) that nuclear is our only hope for avoiding meaningful global warming. I think multinational Unilever is making a big difference with some of its internal initiatives; some others would put it on their banned list. Etc.
i.e. I wouldn’t presume to be sure what will harm your two-year old son in the long run, and I wouldn’t trust many others to be sure either.
As a result of the above there’s unlikely to be many articles about that here, though perhaps some more on how to reach your own decisions. 🙂
I think that one has to be a pragmatist when thinking about V-B Investing; although it is entirely possible (with a lot of very hard work) to set up a fully screened portfolio hinged around your particular concerns this naturally brings down the number of stocks that can be included in such an arrangement. Clearly, that can up the ante as far as the risk profile is concerned as such a concentrated portfolio might be skewed, for instance, into too many technology stocks. In addition, I would say that the majority of my clients who have ventured to take a walk down this particular road like to make money in the long-run just as much as anyone else!
Just to venture a specific example, one of my favourite, albeit very “active”, recommendations for long-term funds is Scottish Mortgage Investment Trust (SMT). SMT now has a market cap of over £5bn and is likely to enter the FTSE 100 later this month. I particularly like to chunk of unlisted investments in the portfolio, although I take on trust the manager’s comments about these as they are hard to research. Amongst the conventional stocks we find BASF and Rolls Royce. Some “dark” V-B investors would baulk at these two stocks as BASF has a murky history (look it up) and RR makes engines for military aircraft amongst other things.
However, the overwhelming majority of the people I have dealt with are content to hold SMT shares as they are, as I said above, pragmatic and realistic when looking at these issues. So, for some, SMT will be a recommended fund for part of their portfolio (mind you, it is rather “bouncy” from time-to-time).
As I have said before, its very much a series of personal decisions and there are quite a few IFA businesses ploughing this particular furrow nowadays, and some do seem rather ambitious as far as their charging structures are concerned, but with the web you can screen your own portfolio if you have the time and inclination.
Good post. I like the idea of values-based investing, but as an active stock picker I think it’s too much work for one person to do a good SRI/VBI-based analysis on top of the usual financial/valuation analysis.
I invest my son’s savings into tracker funds though, so perhaps I should switch his tracker funds from Vanguard (cheap) to say Legal & General (a signatory of the UN Principles for Responsible Investment), despite the higher fees? Probably yes, I think.
I know John Bogle has spoken about fund managers intervening in company plans, and Vanguard have a policy on responsible investing https://about.vanguard.com/vanguard-proxy-voting/responsible-investment-policy/index.html
I struggle with the notion that you “support” the companies you invest in. As Rich24 said, you buy second hand. All (outstanding) stocks need an owner and buying a share of a company is more of an expression of your expectations, rather than a result of a consultation with your moral compass. Sustainable businesses need custumers and support from legislators, not investors in the secondary market.
Vote with your money through changes in consumption, not investments (My personal opinion) unless you can buy a big enough share to change the company.
I have heard it said (in an argument for divesting of coal stocks), that you wouldn’t want to be the last investor in an asbestos manufacturer now, would you. Well. No, that I would not. But at least in green investing there is a problem of good and bad being bundled together. For instance, Shell and BP both have green energy projects, and I’m not convinced that biofuel made from intensively farmed corn is necessarily all that good. It’s difficult to find a fund tailored to my particular definition of “good”.
I think there’s an untapped market in that area, perhaps an investing platform, that would allow you to configure your own SR fund. Like one of those build-your-own-PC outfits we have.
@hosimpson yes that’s what I’m looking for .. a platform that allows me to set my own rules but otherwise constructs a basket based on an index and at low cost .. Does such a thing exist yet? Vanguard world minus tobacco companies for example.
I’m surprised nobody has mentioned Stewart Investors’ (part of First State) Sustainable Funds group. They are the only ones I back, as they think about it much more constructively than just filtering out things from an index.
Unfortunately most of their funds are soft-closed (also commendable), however there their Global strategy is open (Worldwide Sustainability), and their larger, open, Asia Pacific Leaders fund is now adopting a Sustainability strategy.
The Worldwide Sustainability fund is surprisingly under-researched, and I think it’s a very interesting fund when you dig around under the bonnet.
I’ve mentioned this in comments before, knowing I’m up against the general Monevator vibe, but SRI etc. is one of the key reasons I’m against Passive investing.
Interesting piece. You are spot on with the observation that everyone’s values are different and it therefore makes sense to look hard under the bonnet. As for myself I am in practice often immoral but with a happy habit of going regularly to confession so I can start all over again with a clean slate. Ethical investing is probably not for me.
@Hospitaller: I think you will find that a firm purpose of amendment (i.e. the intention not to ‘do it again’) is necessary for a clean slate.
@rick24: Details, details. I am a big picture man (with a flexible priest).
I think there is lots of good research in this post although there are a few questions I think are hard to answer and generally lead me to think that SRI is not an effective way to do good.
One is whether divesting leads to companies to stop doing what they are doing or if it just leads people who don’t care about that particular issue to make more profit as a company may not depend on investments in fossil fuels, they depend on people consuming it. That then means people trying to ethically invest are just giving money to other investors.
Here’s a link that looks at the first question a bit more http://www.newyorker.com/business/currency/does-divestment-work
Also looking at it from another angle, this article looks at how to invest for a positive social impact.
https://ssir.org/up_for_debate/article/impact_investing
There is also a question of whether spending time trying to find socially responsible investing opportunities could be time otherwise spent looking at how to increase impact with donations or your career.
I try to invest ‘ethically’ and it does create quite a bit of extra work. I think the key is to use a variety of tools to pick funds.
As you say generic tools, like the Morningstar Sustainability Tool, have the advantage of allowing one to look at funds that may not be marketed as SRI or ethical but which provide good social and environmental governance.
For example, I wanted a social responsible Emerging Market fund that was not an ETF. I wasn’t keen on the very high initial and on-going fund fees of Stewart Investors Global Emerging markets fund (the go-to ethical fund in this geographical area). But the Morningstar tool threw up JPM Emerging Markets Income C Fund Acc, which is not marketed as an ethical fund but is rated highly by Morningstar for social responsibility (4 globes at the time).
The problem with general screening tools is that they don’t allow you to filter for specific ‘sins’, as you indicate. For example, Morningstar gives the two Vanguard SRI products (the European and Global SRI funds) a rather weak three globes. But the European fund lists British Tobacco as one of the companies that it invests in. That would exclude it from my investment criteria. I therefore have to do some more digging into funds.
The more specific ethical screening tools, like http://www.3dinvesting.com, allows one to screen out specific unpleasantries. I have found these helpful in exposing funds that are called ‘ethical’ but which really don’t deserve the name. They also throw up some interesting ideas that I would not have necessarily considered. But the disadvantage is that they tend to only focus on funds marketed as ethical and SRI. I therefore try to use several screening tools and read the Key Facts sheet carefully, as others have mentioned.
This relates to another problem that I have found with ethical investing. As well as the extra work and greater cost that you have mentioned, there is the problem of putting together a balanced portfolio. Certain areas are very difficult to invest in ethically. For example, suppose one’s guilty pleasure is a sprinkling of the gold stuff (in case of world disaster, the apocalypse, etc). Finding a sustainable gold fund is like panning for nuggets in Croydon. The best I have found is Investec Global Gold I Fund Acc (3 Morningstar globes).
The reason I invest is because I want to further my meagre savings for my children’s future. But the reason I invest ethically is precisely because, ultimately, I am more concerned about whether a fund’s investments (on balance) are ‘good’ or ‘bad’ in themselves, rather than whether ‘good can triumph over evil’ in financial returns. It is quite common for ethical investors to adopt such a ‘prinicipled’ (rather than ‘utilitarian’) approach to investment. Yet I feel that this ethic is often not understood in the financial sector, which tends to (uncritically) adopt the opposite ethical position.
In regard to @David Nash’s point about the best use of time, can one not invest ethically and seek to increase the impact of one’s donations and career?
I have also found this useful http://www.yourethicalmoney.org/investments/
I’d appreciate anyone explaining this to me:
Let’s say I really love ready meals and there two main players in the frozen ready meals market; EvilMeals and GoodMeals. I’ve always loved EvilMeals but discover that they are effectively using slave labour to produce their meals. I learn that GoodMeals has enlightened and sustainable practices at every stage of the production chain, so I switch to GoodMeals. I am happy to know that I have deprived EvilMeals of some profit, however small, and added to GoodMeals profits.
Suddenly, my Great Aunt Augusta dies and leaves her enormous stock of frozen EvilMeals to me. These have already been bought, so I happily eat them all in the knowledge that I am not contributing to EvilMeals. I do not care about the taint of eating slave-made meals, because I am following a consequentialist logic, and my eating these pre-paid inherited EvilMeals does not in any way encourage slavery.
How does this moral philosophy work when it comes to investing? If I exclude EvilMeals from my investment portfolio have I undermined them by making their valuation ever so slightly lower, thus slightly reducing the additional funds they could get by selling/creating stocks in the future? Or have I done nothing but remove myself from the taint of part-ownership of EvilMeals, without actually making any difference to the world?
@Nick — I don’t think I can do justice to that deep philosophical question with a quick comment. 🙂 Perhaps other readers will come along. Two quick points though:
1) I don’t think eating your stock of EvilMeals is as neutral as you imply. While you’re eating them, you’re not buying food from GoodMeals. And as this is a thought experiment, for it to be interesting/useful we have to assume this would be systemically possible, so that tens of thousands if not millions would be doing the same thing. What would the impact be? Less money to GoodMeals overall. Probably better to feed the EvilMeals to animals, from a pure economics perspective. Maybe even landfill. (Not so much an environmental one!)
2) There are those who would say you’ve made it slightly harder for them by eschewing ownership (again, writ large at a scale when lots of people/funds are making such a decision). As you say, their ‘cost of capital’ has probably increased a tad, especially when it comes to selling their own stock.
However if they’re getting all this cheap slave labour and people are buying enough to the extent that the Aunt Augustas of the world are stockpiling the stuff, their cashflow is probably excellent. Huge margins, and great cash conversion!
In other words they’re going to be great prospects for their local bank manager, who will happily lend them loads of money cheaply. Which is what we’ve seen with tobacco stocks over the years, for example.
Personally I am not mad for SRI. There’s an appeal to it that I can see, and I have my own (to me unjustifiable) biases, such as I won’t buy tobacco companies individually. I just don’t want to have that on my conscience. But if they’re legal and in an index, I don’t lose sleep over it.
We make a much bigger difference as consumers, I feel, and as campaigners and lawmakers.
I can see an argument too that engaged shareholders in the EvilMeals of the world might be able to tilt their behaviour, more than if they sold up and moved on.
As they say in the relationship advice columns: It’s complicated! 🙂
Basically I think the more people are thinking about this stuff and letting it nudge how they act, the better the world gets, whatever their preferred method of ‘acting’. I don’t think there’s any one right way.
@TheInvestor Thanks very much for such a great reply!
1. You’re right, I didn’t think it through and my EvilMeals thought experiment doesn’t work. Oh well, it was just a convoluted way of saying that in the world of investing, I only care about consequences and am not concerned with concept of owning stocks in unethical companies if my ownership doesn’t actually help them in any way. I was delighted to see the world of EvilMeals/NiceMeals fleshed out though.
2. Would it be accurate to summarise your arguments as follows?
A. Eschewing unethical company stocks *probably* slightly increases their cost of capital, and therefore *probably* undermines them slightly in the same way as boycotting their products would.
B. But, unlike boycotts of products/services, boycotts of stocks will never be enough to seriously hurt a corporation, because they can still get plentiful funds from revenue and borrowing.
C. Likewise, boycotts of stocks will never have the same impact as campaigners and lawmakers
D. Arguably, we’d do more good as engaged shareholders of unethical companies
As a loyal and true believing reader of this blog, Argument D, is never going to apply to me as I only invest in index funds. I entirely agree with B & C, but they don’t provide any reason *not* to eschew unethical funds. The key argument is A, where a lot weighs on the “probably”.
To put my cards on the table, there are only a handful of ethical index funds, and restricting myself to them would prevent me from diversify into sectors like small-caps and emerging markets, so I kind-of *want* to believe that ethical investment makes no difference. On other the hand, I can’t get rid of the fear that I might be fuelling horrendous business practices. I can’t help but suspect that I may be party to the same blithe attitude to the ethics of investment that meant most 18th Century investors were perfectly happy to invest in the slave trade, or 19th Century investors in factories that sent children into underground pits for 12-hour shifts. Some modern-day business practices seem almost equivalent to that, so if there’s even a small probability of our money fuelling them, shouldn’t we stop?
I suppose if the impact of eschewing unethical stocks is lesser than the impact of funding ethical-business campaigns with the additional profit gained by investing unethically, you can justify that (as previous commenters have already more-or-less said). The 18th Century equivalent would be deliberately investing in the slave trade in order to maximise funds for the abolitionist movement.
Boycotting stocks may only marginally affect the capital of a company, but I think such large-scale action can significantly stigmatise a company and may affect the value of the CEO’s share options, which can produce beneficial results, if only their pain!
I guess one could debate the impact of ethical investments and the most effective way of influencing unethical businesses. But, Nick, I think you get to the heart of the matter when you question whether we should continue to invest in companies even if there is only a small probability of our money fueling their horrendous business practices.
I think your example of 18th Century financiers investing in the slave trade is pertinent. Wouldn’t it be odd for Wilberforce to be campaigning against the slave trade and yet be investing in the shipping companies that carried the slaves, regardless of how he spent the proceeds? People rightly called out the Church of England for similar inconsistencies in their dealings with Wonga.
But your unease may highlight a deeper difficulty for the consequentialist investor. One of the strong arguments against a pure consequentialist ethic is that you can justify the abuse of minorities (like black slaves working in the British Isles) based on the benefit of the majority (like the economic fortunes of white middle-class British investors).
The fact that you are having a dilemma around questions of justice, possibly indicates that you are more deontological in your ethics than you thought!
Thanks for the reply @Al! Well argued.
I’m actually not a utilitarian at all – I think it’s unworkable (there are different types of pleasure/welfare and no universal measuring stick) and inhuman (i.e. it may be rational, but it’s just completely at odds with how human psychology works). I don’t believe in universal deontological rules that ignore context either though. The only ethical system that seems workable to me is virtue-based ethics – i.e. it’s your character and motivations that count, including a willingness to understand and take account of the consequences of your actions.