Recently my friend Elijah, owner of Musiprof, asked me about ethical investing. His concern is that he doesn’t want any of his hard-earned money going towards oil companies.
I sense that Elijah is interested in socially responsible investing (SRI). The idea goes by other names such as green investing, ethical investing, sustainable investing, impact investing, or socially conscious investing.
Socially Responsible Investing (SRI) is an investment strategy that seeks to generate both financial returns and positive social or environmental impact. It involves selecting investments based on ethical, social, and governance (ESG) criteria, such as environmental sustainability, social justice, and corporate governance practices.
SRI aims to align investors’ financial goals with their personal values by excluding industries or companies that engage in practices deemed harmful or unethical, while actively seeking out those that contribute to societal good. This approach not only addresses investors’ desire for ethical alignment but also considers long-term risk management and sustainable performance.
In general, Elijah and millions of others like him want to avoid investing in companies involved with alcohol, tobacco, gambling, pornography, weapons, human rights violations, or poor employee relations.
At this moment Elijah is invested in a Canadian Index with 20% allocation towards the energy sector. There are only a few SRI funds in Canada, and the few that exist have higher management fees.
If you invest in the US and want to avoid oil, one option is to buy all the sectors except the Energy sector, or you can invest in one of the many SRI funds that have inferior returns to the S&P 500 with higher expense ratio.
Everyone’s values are different
One of the problems with ethical investing is that people’s moral values are different.
Some examples are clear-cut. If a company makes bombs or machine guns, there is no doubt that those weapons are for killing people and I think that most ethical investors would want to avoid those companies.
But what about companies like Walmart? Some people say that it violates human rights because it prevents workers from forming a union. Other people say that Walmart is a savior for poor people by providing good quality products at low prices.
Some of the biggest arguments against big companies are that the employer has too much power over the little guy. A regular employee has no way to defend themselves if there is a disagreement. For example, if there is an accident, the employee could get dismissed without any compensation.
Another example is chicken farming company. Some people say that it provides affordable chicken and eggs to the masses. Other people say they represent cruelty to animals.
A winery in California. Millions of people see nothing wrong with drinking a glass of wine after dinner. Others see the sale of alcohol as a complete violation of their moral principles.
And to address Elijah’s distaste for oil. We depend on oil products every second of our modern life. From the plastic keyboard on our computers to the plastic toothbrush we use every morning. We can get our oil from the oil sands in Canada (this is considered dirty oil) or we can get it from the middle east where there are constant human rights violations, but there is no replacement for oil derivatives products in modern-day society.
Sure, green energy is advancing rapidly but I don’t see how green energy could replace all the plastic, rubber, and other chemical byproducts that are derived from oil.
The truth is that a portfolio is not the best way to express one’s moral choices.
Let’s imagine two companies: “Good Company” and “Bad Company”
Both companies have shares in the stock market for $10 and both companies pay 1 dollar in dividends every year. In short, the return on investment is 10%.
A campaign against Bad Company and in Favor of Good company moves the share price of each company. Now Good Company shares cost $20 and Bad Company shares cost $5. But regardless of their share price, they still pay $1 in dividends.
As an investor, if I pay $5 in Bad Company for my $1 of dividend, now I make a 20% return on my investment. If I pay $20 in Good Company for my $1 of dividend, now I make a 5% return on my investment.
In the stock market, the Bad Company shareholders will be rewarded and the Good Company Shareholders will be penalized.
How to create an impact
The best way to create an impact is to vote with your dollars. As a consumer, your voice is much louder and corporations eventually listen.
For example. My friend Cheryl, English teacher, has been a vegan for many years. When I met her she was the odd person with the different eating habits, but little by little the vegetarian and vegan community has continued to grow. Now there are more and more vegan restaurants all over the city. Cheryl and millions of other vegans have voted with their money and corporations are listening.
Another example is the company Gucci which announced that they will no longer use fur in their designs. They are responding to the demands of the consumer. The consumer has spoken and Gucci is listening.
You can have a much bigger impact as a consumer than as a stock holder
The best way to change a company’s behavior is not by buying or selling its share in the stock market, it’s by buying or not buying its products. If you and millions of others boycott their products, management will realize that they have to change quickly.
Another way to create changes is to lobby the government and ask the government not to buy products from those companies.
You can also express your SRI with your political vote. For example, in the US, the people voted for Donald Trump, a person who denies climate change and who wants to revive the coal industry at the expense of cleaner sources of energy. Many people who care about the environment didn’t bother to vote, and so, they have to live with the consequences of having Donald Trump as president.
In short, you will have a bigger voice if you express your SRI by the way you consume and by the way you vote than by the way you invest in the stock market.
Comments
5 responses to “Socially Responsible Investing: More Hype Than Impact”
“Let’s imagine two companies: “Good Company” and “Bad Company”
Both companies have shares in the stock market for $10 and both companies pay $1 dollar in dividends every year. In short, return for investment is 10%.
A campaign against Bad Company and in Favor of Good company moves the share price of each company. Now Good Company shares cost $20 and Bad Company shares cost $5. But regardless of their share price, they still pay $1 in dividends.
As an investor, if I pay $5 in Bad Company for my $1 of dividend, now I make 20% return on my investment. If I pay $20 in Good Company for my $1 of dividend, now I make 5% return on my investment.
In the stock market, the Bad Company shareholders will be rewarded and the Good Company Shareholders will be penalized.”
I’m sorry, but this example illustrates exactly the kind unethical thinking that ethical investors, for the most part, are looking to avoid. You correlate “rewarded” and “punished” with “making money” and “making money, but not as much.” Combined with the statement that “[t]he truth is that a portfolio is not the best way to express one’s moral choices” it seems as though you’re saying that you shouldn’t worry about ethics with investments because you stand to not make as much money – a prime example of unethical thinking.
There are many examples in which doing the ethical thing means taking a hit. Sure, you could murder your competitor and probably get away with it, earning you a cool 20 million, but maybe don’t do that? Yeah, clear-cutting this pristine forest on native land that you have a right to log because of a loop-hole in the law is probably very cost efficient, but maybe reconsider? Ethical choices take strength of character, dutiful consideration, and lots of perseverance. Very often ethical behaviour on the part of businesses are less cost efficient and slower. They often don’t translate to profits or quarterly earnings – in fact, they may cost you, but for the ethical business that’s OK because sometimes there are considerations more important than profit.
Hello Jan,
Thank you so much for taking the time to add to the conversation.
I totally get where you are coming from. My perception of investments is changing over time and I am feeling disgusted with some of the holdings in my portfolio.
Here is my dilemma.
I like index investing. In particular, I like just holding just three indexes. I like one index representing the Canadian economy, one index for the US economy and one index for the ensemble of international companies.
At the same time, I am becoming vegan and I want to take stand against animal cruelty. I think it’s atrocious what we do to cows, pigs, chickens and fish. I wish I could own the Toronto index and the S&P 500 without all the companies which profit from animal cruelty. But such a financial product doesn’t exist, and I don’t have the resources to anything other that owning the general market index.
On the other hand, I can vote with my dollars every day that I don’t buy meat, every day that I don’t buy milk, eggs, leather, cheese, etc. In addition, I can influence my environment, my friends, my family. Little by little we are contributing with our spending behavior less and less towards the animal holocaust. I feel proud of my activities to save animals and the environment. I feel that with my money and my influence I can make a difference much greater than by not buying the S&P 500.
I appreciate your point of view and I thank you for your contribution.
Hey Jan,
I am still so grateful that you added your voice to this post.
I would like to add a few more examples of how I vote with my dollars.
1. 80% of the clothes I wear is second hand. Basically I only buy new underwear and socks. Almost everything else I buy it from second hand stores. For me it’s very important to reduce waste and pollution.
2. At age 50, my main means of transportation are my running shoes and my bicycle. I hate gasoline consumption.
3. Many of my blog post and coaching sessions are about frugality. How to do more with less. I can see that I have persuaded a few people to spend less, to waste less, to care more for the environment and our animals.
Thank you for giving me the opportunity to explain myself further. 🙂
Hey Matt,
Thank you for the comment.
I went to your website and I love it. I love the theme, the images, the content. However, How about a little about you, the super hero behind the website.
Congratulations. 🙂
Agree with you that people have more of an impact on the consumer side than the investor side. You could argue almost every company does something wrong (e.g. Procter & Gamble makes diapers which fill up landfills). As an investor, it’s hard enough to evaluate companies based on cash flow and other tangible metrics.