‘Good People’ have a moral compass. ‘Good People’ adhere to universal ethics. ‘Good People’ care about others. ‘Good People’ care about more than just making money. Therefore, ‘Good People’ who invest their money engage in Socially Responsible Investing (SRI). Following this line of thinking, ‘Bad People’ do not engage in SRI, are selfish, greedy, and immoral.
Yikes! On several fronts that’s too, too, too … it just doesn’t sit right with BuddhaMoney. Okay, still, is it True? False? Simplistic? Naïve? All or None or One or more of the above?
SRI Investors: Who Are You?
Before picking a side and jumping to conclusions, let’s flush out the concept of SRI or Ethical Investing, two terms often used interchangeably.
At its core, SRI implies investing in companies that meet a certain standard of corporate responsibility regarding social, environmental and ethical considerations. Generally, investors who take an interest in SRI fall into two camps:
- Camp 1: SRI is an investment with a charitable component, in which non-financial rewards of the investment are just as important, if not more so, than the rate of return.
- Camp 2: While corporate SRI practices may add value to their investment strategy, potential rate of return is the dominant consideration.
As with any issue under the sun, there are proponents and critics of SRI.
Proponents believe that SRI is about ‘doing good’ by seeking a blended return, i.e., investing in companies that offer both strong financial return and social return.
That said, proponents do not hesitate to acknowledge that a business must turn a profit if it is to survive. But, they say, if the only focus is profit then survival is far from assured.
SRI Boo Birds
As for SRI critics, they hang their hat on the words of renowned free market economist Milton Friedman:
“There is only one social responsibility of business: to increase profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud”.
Friedman’s followers lay responsibility for social issues at the feet of government, not private enterprise. Further, they assert that SRI investors are willing to accept lower financial returns for only the promise of vague and loosely measured social returns.
What’s the Purpose of Investing?
I’m not looking for a right or wrong answer, or to label anyone Good or Bad. For me, this is a personal issue to be determined by thoughtful examination of your conscience, your beliefs, and by asking your self, what is your purpose for investing?
- Is investing about ‘doing good’ by seeking a blended financial and social return?
- Is it about making a difference by supporting organizations that take a stand against human rights violations, lax environmental controls?
- Is it about penalizing organizations that sell liquor or tobacco, that facilitate gambling and enable addicts?
- Does ‘doing good’ mean you do not buy shares of companies that bribe government officials, lie and cheat, do not provide safe and fair working conditions for employees?
- Or does it mean that, although an organization is not blatantly or even slightly offside on the ‘sin scale’, it just doesn’t measure up for other reasons, and whatever those reason are justifies steering clear.
- Maybe investing is a simpler, singular, concept. I mean, why should it be about anything more than making money?
The thinking here is that if you want to support charitable causes, if you want to ‘do good’, then you will do so through donation of your time and/or money to registered charities, not through investing. Further, so goes this line of thinking, by not restricting your self to investing in SRI organizations, you have so many more available investment opportunities. And the better your investments perform, and the more money you make through investing, the more you are able to support worthy causes.
What do you think? There’s no right or wrong on this one, although some may disagree. The best you can do is to follow your conscience and avoid investing in organizations that do not meet your standards, whatever these may be. Because you have no one to answer to except your self.
Here’s the conventional thinking about SRI Investing:
Social Fairness. Through investing, supporting companies that you believe promote social fairness.
Ethics. You vote with your dollars to support organizations that adhere to ethical business behavior.
Poor Investment Returns. Companies pursuing socially responsible activities may not maximize shareholder value since all capital in the company is not primarily used to increase profits.
Increase Risk. Because there are fewer companies that qualify for SRI, there are fewer opportunities for portfolio diversification. In turn, this may increase overall portfolio risk. As well, companies engaged in socially responsible activities may have higher risk due to lower gross profit margins.
Lost Opportunity. You may be leaving potentially strong investments on the table not necessarily because the company is inherently evil or even terrible on SRI issues but because they don’t measure up to someone else’s standard of what qualifies as an SRI worthy company, even though that company’s products/services do improve the human condition in some manner and creates jobs.
Spin. Few companies do not employ marketing spin. Meaning, the company may be adept at creating an image of social responsibility but less competent at engaging in socially responsible activity. So, it’s essential to do your homework, to know that the company’s actions are in line with its image.
I know, that’s a a fair bit of information to chew on. So, hey, go ahead, take your time, there’s no rush. Once some clarity comes your way on this issue, and if you decide you would like to put dollars to work, you might start by researching the Funds listed below (big important note: I do not hold any of these Funds nor am I endorsing them):
- iShares MSCI KLD 400 Social Exchange Traded Fund (DSI:NYSEARCA)
- Domini Social Equity Fund (DSEFX)
Now, if you decide to buy these Funds or other Funds or companies falling under the SRI umbrella, just remember that your ownership of such securities doesn’t qualify you as ‘Good’ or ‘Bad’ People. Nah. No value judgment. Instead, you’re an investor doing what is best for you and your family.