The case against socially responsible investing (SRI)

Abstract:

As attractive as it sounds, investing with a bleeding heart only leads to a bleeding portfolio.  Socially responsible investing costs both you and the causes you care about a lot of money and goodwill.  There are better ways to both invest your money and affect positive change in the world.

Specifically, over 10 years of investing $25,000 per year (about the max you can invest in tax-advantaged accounts), a socially responsible stock portfolio will be worth almost $30,000 less than a normal indexed stock portfolio (over 1 year of work wasted per 10 years).  To make things worse, most of the money “lost” isn’t actually going to the companies doing good, nor is it leaving the companies doing bad.  It’s just providing slightly better deals to all the other more opportunistic stock investors out there.

On top of that, you would need twice as much money in a socially responsible portfolio (50x average annual spending) versus a traditional one (25x average annual spending) to retire early.

Invest to make money and donate to do the most good.   Don’t confuse these goals; when it comes to investing and social responsibility, half measures don’t get the job done.

Intro to socially responsible investing (SRI):

A friend on twitter recently posted an article titled, How the Gates Foundation’s Investments Are Undermining Its Own Good Works.  This was the first time I had really come across the idea of socially responsible investing (not exactly the same as impact investing, but in the same family), and it really intrigued me.

The basic idea behind socially responsible investing is to make ethical investment decisions across the board.  This can be defined both positively and negatively.  The negative definition would be “do no evil,” while the positive definition would more narrowly require investments in companies with a proactive social or ethical mission.

For example, the negative definition might require that you divest all investments from tobacco companies, while the positive definition would require investments in companies actively working to make a positive impact in the world, such as solar panel manufacturers.

hippie penguin

dude, should I invest in a socially responsible portfolio?

Financial performance of SRI’s:

I really wanted socially responsible investing to be equally, if not more profitable than normal index investing, but sadly it is not.  One of the biggest problems with socially responsible funds is that they have high fees that really eat away your returns (it costs money to evaluate the evil or virtuousness of all those companies).  On top of that, SRI funds grow slower too.

Not surprisingly, Vanguard has the lowest-cost socially responsible mutual fund out there.  The interesting and potentially disheartening thing about Vanguard’s socially responsible fund, The Vanguard FTSE Social Index, however, is that it actually only seeks to mimic the return of other social indexes (it is defined negatively rather than positively).  But that is what helps keep expenses low, and at a minimum, you’re still not investing in evil, although somehow Chase, Bank of America, and Citigroup are all still included in the 10 ten holdings…

But anyway, to compare the financial performance of SRI to normal investing, I looked at the total return of Vanguard’s FTSE Social Index Fund versus Vanguard’s Total Stock Market ETF.  Here are the results:

VTI vs VFTSX

As you can see value of $10,000 at the end of 10 years would be worth almost $24,000 with the total stock market ETF but only about $20,000 with the FTSE social index.  The initial reaction is that $4,000 over 10 years isn’t that big of a deal, but there are two things to point out.  First, that $4,000 difference is worth almost half the initial investment!  Secondly, on a compound annual basis, the SRI fund returns about 2% less than the total stock market fund.

Putting this in the context of saving for retirement, remember the 4% safe withdrawal rule.  The 4% safe withdrawal rate is the maximum rate that an individual can successfully withdraw from a typical portfolio without reducing their ability to withdraw an equal, inflation-adjusted amount the next year.  A 4% withdrawal rate leads to a theoretically infinite portfolio.

Now here is the interesting part.  If socially responsible investing returns 2% less per year than normal investing, then the new safe withdrawal rate on a SRI portfolio is 2%.  In other words, you would need to save twice as much in a SRI portfolio (50 times annual spending, to be exact) as you would need to in a normal portfolio (25 times annual spending) to finance the same spending levels in retirement!

euro

Would you rather have to earn 50x or 25x your annual spending to retire?

So now the real question is, are the benefits of socially responsible investing worth the additional cost of having to double your retirement savings relative to normal investing.  In real terms, for a family spending $40,000 per year, is it worth saving an extra $1 million before retirement simply so you don’t have to invest in companies that do evil?  My answer is no, and I’ll tell you why.

The case against socially responsible investing:

First and foremost, there are MUCH more effective ways to affect positive change (or minimize evil) in the world with a fixed amount of money.  There are two sides to this argument, and I’ll start off with side a, namely that refusing to buy stock is a bad way to “punish” (or reward) companies.

Let’s talk about what stock is.  Stock is simply a claim on the future earnings (profit) of a company.  If a company makes $100 this year and there are 100 stocks on the market, then each stockholder is theoretically $1 richer.

Why do companies issue stock in the first place?  They issue stock to raise money to grow their businesses.  So, in theory, if enough people refuse to buy the stock of an evil company, the company won’t be able to raise as much money.

But here is why it doesn’t work that way: most stock market transactions are secondary transactions, meaning that you’re buying or not buying a stock from another investor, not from the company (I, an individual investor, sell to you another individual investor).  The company doesn’t really see any of that money after the initial public offering.

At a maximum, a company will only issue new stock a handful of times such as their initial public offering and sometimes secondary offerings after that.  Once a stock has been purchased in the initial public offering (or secondary offering), the company will have already raised their money.  So by extension, refusing to invest in evil companies that have already had their public offering really isn’t punishing them at all.

Secondly, what refusing to buy evil stocks is really doing is artificially lowering the price of said evil stocks in the marketplace.  This means you’re giving “less-ethical” investors (or computer algorithms working for investment banks) the chance to make even more money through the purchase of evil stocks, at your own expense to boot!

Similar to the tragedy of the commons, what this does is simply make ethical investors less and less powerful (rich) in comparison to all the other neutral and/or, dare we say, evil investors out there (and there will ALWAYS be other investors out there).

There is a possible argument to be made that if enough investors decide to boycott certain stocks, the holders of those stocks will see the value deteriorate, which could theoretically prompt shareholder activism for change.  This probably wouldn’t ever happen, however, because the more people that boycott a stock and depress its value, the sweeter the deal becomes for someone to break ranks and gobble up a bunch of stocks at happy-hour prices (I repeat, there is ALWAYS another investor out there).

The flip side (b side) of the fact that “voting” with your investment dollars is a really ineffective way to punish and/or encourage positive change in the world is that there are actually some much cheaper ways to make a difference.

Let’s face it, even if voting with your dollars did work, determining the righteousness or wrongness of an entire company is a really ambiguous task.  Coke, for example, does a lot of philanthropic work around the world, but they also actively market unhealthy beverages to kids and families around the world.  Even if you could invest in or divest from Coke and affect change in the world, the result would be somewhat complicated.

Coke’s three priority areas, to which they contribute a combined 1% of their operating income, include economic empowerment of women, access to clean water, and well-being (active healthy living, education, and youth development).  Investing in Coke because they’re actively trying to make a difference is sort of confusing two separate goals.  The goal of investing is to make money (for yourself), while the goal of social good / social responsibility is to make life better (for other people).

It is mathematically impossible to maximize for two variables at once, so what should be the focus?  How does one balance making money and doing good?  If the focus is making money then by all means, invest where your money will grow the fastest.  If it is doing good, then give that money to the place/person/organization that will do the most good with it (see my recommendations).  At best, socially responsible investing is an ineffective half-measure that is both costly to the investor and the causes they care about.

The well-intentioned parents example:

Let’s say you get a job right out of school at a publicly traded company like Apple, and your generous and loving parents want to make sure their son or daughter is financially secure going forward, so they decide to buy a bunch of Apple stock to boost the company (and your job prospects).  This is a really really indirect way of accomplishing their goal because the money doesn’t go to Apple anyway (Apple went public years ago; the money just goes to another investor).

The generous, well-intentioned parents realize their folly and decide instead to replace all their PC’s and Andriod phones with apple devices.  This actually does move the needle a little bit for Apple the corporation, but because Apple is so big, it might as well be just another grain of sand on the Apple beach.

Finally, they wise up to the fact that they’re still not really helping their son / daughter have a more secure financial future by keeping demand for Apple products marginally higher than it would be otherwise.  Instead of wasting money on expensive new Apple computers the next time, they buy cheap Chromebooks, and give all the extra money they would have spent directly to their child.

Maybe they add the stipulation that it needs to be invested in retirement or education or something other than beer, but ultimately, they realize this is the most effective way to achieve their goal, similar to the SRI situation described above.

The “evil” career parallel:

Similar to the evil stock scenario and conclusion discussed above, the big-name effective altruism outfit 80,000 Hours recommends that people go into  what some would consider “evil careers” such as wall street banking instead of working for nonprofits.

clocks

80,000 is the amount of time devoted to a lifetime career

Their argument is that an individual can accomplish a TON more by donating the difference of what they would make in the non-profit sector and what they make on wall street to really effective nonprofits.

Doesn’t sound too different from the SRI discussion above…

The ROI of not being a socially responsible investor:

The true cost of socially responsible investing vs. normal investing is inevitably much higher than what this 10-year ROI example shows, mainly because most people’s investment horizon for retirement is much longer than 10 years, and the losses will compound over time.

In this example, I simply compared a 4% real rate of return (my default growth assumption) to a 2% real rate of return (SRI’s return is 2% less on average according to my calculations).  And I assumed that an individual is investing a total of $25,000 per year (roughly equivalent to maxing out IRA, 401k, and an employer match).

How much better would the normal investor be?

  • 10-Year NPV: $28,050
  • 10-Year ROI: 280,054%
  • 10-Year Payback: 0.0 years
roi - normal investing

click for link to live spreadsheet

chart - normal investing

Being a normal investor and investing $25,000 per year for ten years means you will have earned almost $30,000 extra versus the socially responsible investor… good job, this is worth more than 1 year of savings (work) for you!

Now for the socially responsible crowd, take it a step further and you’ll have both made more money for yourself and made a bigger difference in the world… take a part of that $30,000 dollars, let’s say 10% ($3,000) and give it to a really effective charity for a cause you care about.

For example, in the U.S. you might give the $3,000 to the Nurse Family Partnership or to Knowledge is Power Charter Schools.  Or if you want your money to go even further towards making a difference in the world, give it to an organization like Give Directly or The Against Malaria Foundation, which saves kids’ lives at the modest cost of $3,400 per child.

I would be willing to bet my entire life savings on the fact that donating that $3,000 to a really effective charity would do significantly more good than investing the total $30,000 in socially responsible funds.

The truly generous could take it even a step further, recognizing that they would have “lost” $30,000 in the SRI case, and could choose instead to donate all $30,000 to a place like The Against Malaria Foundation, saving nearly 9 lives in the process.

Conclusion:

When I first heard about SRI, I was really excited and even considered switching my entire stock portfolio over.  However, after doing the research, I realized that I would only be punishing myself and the causes / people I care about.  There is a better way to do things.  Voting with your dollar has it’s place in life, but that place is definitely not investing.

Invest well, spend well, give well.

Save like a Canadian
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Comments

  1. Yep, this matches my research into it. I’m not jazzed that my investments are partially terrible companies… but moving my money will do exactly nothing to hurt them.

    Working in the nonprofit space, I’m a big fan of finding small, local nonprofits that you can both donate to and volunteer for. Then you know for sure that your money is being deployed in a useful manner AND you can add the considerable (hopefully) benefit of your time.

    Of national charities, Give Directly and Doctors without Borders are my faves. Extremely effective, in very different ways 🙂

    • Glad we’re on the same page. I didn’t know you worked in the nonprofit sector… good stuff!

      Also glad to see you recommend give directly,. I don’t know that much about them but I’m in favor of cash transfers and decided to donate to them instead of ALS recently during the ice bucket challenge heyday.

      Thanks for the comments Mr. Frugalwoods.

  2. One point…the article seems to assume that the investments are only investments. I’d point out that the high interest in socially responsible investing is itself, even without any effect on actual companies, a signal that shapes public discourse-see divestment from South Africa. Also, by choosing not to invest in certain stocks, you avoid feeling a very personal conflict of interest with regards to the success of those particular companies. I’m not sure these are superior reasons than what you’ve outlined, but they’re certainly real effects.

  3. If the socially-responsible stocks don’t make as much as the general stock market average, could you then only invest in the socially irresponsible stocks and make more than the stock market average?

    Also, this comparison assumes the risk for the total stock market and the Vanguard’s FTSE Social Index Fund are the same, which is not clear. Of course with more risk you can get more reward. But in the 2008 recession, it looks like the socially-responsible fund goes down less, which means it might be lower-risk. A comparison with an equal-risk fund would be more fair.

    • Good point on the risk/return side of the equation Stan. I’m not sophisticated enough to really dive in and do the analysis thoroughly, comparing across time periods and account for risk etc. Don’t mean to imply this anecdotal study is definitive, just directionally indicative.

    • Very fair and sharp comment, Stan! As you can see in the link below, the VICE fund (VICEX), nowadays called the USA Mutual Barriers Investor, has since its inception outperformed both the S&P500, the Vanguard Total Stock Market Index (VTSMX) and its social equivalent (VFTSX).
      http://finance.yahoo.com/echarts?s=VICEX+Interactive#{“comparisons”:”^GSPC,VFTSX,VTSMX”,”comparisonsColors”:”#cc0000,#cc0000,#009999″,”comparisonsWidths”:”1,1,1″,”comparisonsGhosting”:”0,0,0″,”range”:”max”}

      However, I’d like to add that this graph does not include expense ratios and therefore I presume the net performance of the VFTMX (current exp ratio of .05%) and the VICEX (current exp ratio of 1.47%) will substantially converge.

      In addition, for the same time frame, other ‘sin funds’ demonstrate a somewhat different story of performance: http://finance.yahoo.com/echarts?s=VICEX+Interactive#{“comparisons”:”VTSMX,FDFAX,RYLIX,^GSPC”,”comparisonsColors”:”#00ff00,#cc0000,#e69138,#ff00ff”,”comparisonsWidths”:”1,1,1,1″,”comparisonsGhosting”:”0,0,0,0″,”range”:”max”}

      Fidelity Select Consumer Staples Port (FDFAX) for instance underperformed between ’02 and ’08 and has done so since December 2013, again not taking expense ratios into consideration.

      Regarding the risk issue, I’d definitely be willing to sort this out. I am not sure how long this will take so I will come back to that as soon as I have obtained concrete results.

  4. I think the idea of socially responsible investing is completely lost here. What’s
    the point of trying to be socially responsible in other ways (as suggested in the article) but still
    invest money in corporations that go against one’s moral or political beliefs? That’s
    hypocritical. Many of these investors are simply ordinary people with 401Ks that
    are deciding they want to take control of how their money is being invested. That’s
    better than turning a blind eye just for the sake of strong profits. Socially
    responsible investing is for people who want to put their money
    where they think it will do the least harm. Fortunately, there are
    now alternatives to traditional investing for those that care.

    • Erika, I would suggest the thrust of FlannelGuy’s entire piece is to address and refute your position that sri achieves its stated goal. He describes your thesis and then articulates why that position does not hold. As someone new to sri , I would enjoy a defense of your views more than a simple restatement without evidence. Thoughts or links to where that is done effectively?

      • Zachary, I think Erika’s point is not about effecting change so much as being in good moral standing. FlannelGuy’s argument aims to refute the idea that we can make a difference in the world by avoiding certain investments. But another concern people may have is where their money is coming from.

        I think the difference here is between a consequentialist moral intuition (the consequences determine the value of my action) and a virtue-based moral intuition (the attitudinal framework I act from determines the value of my action). FlannelGuy argues that the consequences of SRI are ambiguous or morally ineffective. Erika’s response starts out by saying many folks don’t want to profit from vice. The latter part of Erika’s comment does reiterate the view FlannelGuy is arguing against (“put their money where they think it will do the least harm.”) Probably many of us are trying to making investment decisions with both of these intuitions at work in us.

        The problem for consequentialists is understanding how anyone can have a moral intuition or belief that is not about the effects “in the world”. I suggest that the effect of investing in vice is on the informed/aware investor who (even in a small way) is aware that their life is being supported by something morally repugnant. You can choose to ignore that, but your effort to ignore has it’s own effect on your character (virtue) and inner life, not to mention subsequent actions and the ripple of effects in the wider world.

        The problem for the virtue moralist is understanding how anyone can ignore their own inner life and the inner life of human beings and only look at outer events and actions (“surely it’s our values that tell us which events and actions are good and which are bad”). I’d suggest that the moral intuitions born of our character still need to be checked against the world. Our lives are supported in innumerable ways, many morally good and many morally bad, and this is more-or-less inescapable. Virtue in this life is not just a matter of avoiding evil (not possible). It involves giving attention to this web of cause and effect, doing our best to minimize our wrong doing or support of wrong doing and doing our best to maximize our “right doing” or support of it.

        So in short, to take a concrete position on the subject, I’d say beware any tendency to overlook the immoral in one’s life (in the widest sense of all you’re involved in) but also don’t think you can cut off wrong doing (you’re connected to it in some way) so we still need to ask “what’s most effective?” Personally, I don’t want to be supported by guns and addiction peddling and I wouldn’t directly invest in such companies. I haven’t made a decision yet, but if I go FlannelGuy’s route and invest in conventional broad-spectrum investments, I’ll consider taking some of my gains and directing them to campaigns that take action against wrong doing (use vice’s profits against it). I think FG said something like this above.

        • Very well put Aaron.

          Flannel Guy’s logic is very hard to dispute in a coldly rational way, but as he is fond of “thought experiments”, let’s follow his logic to it’s extreme by taking this theoretical example: suppose you’d been living in Poland during WWII and had a chance to invest in a company that was making money hand over fist building concentration camps in Germany – by FG’s logic, it would be OK to invest in said company, especially if you ended up giving some of your money back a few years later to the “Jewish Survivor’s Fund” or some such organization. Not sure many people would think that was OK, even if you explained your logic that “it was a more cost effective way” to go.

          At least part of FG’s argument is “Hey, if I don’t do it, somebody else will”. To which I would answer, “Perhaps so, but at what cost to your personal integrity?”

          This article sort of smacks of a nice, thinking person’s way to avoid any kind of personal responsibility in where they make their investments, and of avoiding bringing any morality at all into the investment equation. People have been making this and similar arguments for years to excuse amoral behavior to themselves and others.

          • Terry and Ericka NAIL it, here.
            Well said – Take a Bow!

            Seriously, I usually write long, drawn-out responses for stuff like this… but they beat me to it.

            AAron – not bad logic…not bad.
            But Terry sealed the deal with his rebuttal.

            Tears of Joy!

          • Yes, yes and yes!

            I could make a fortune by expoiting people and then turn around and give them some of my money to help them out of poverty. But that wouldn’t sit right with my conscience.

            I’d rather have slower profits and keep my conscience clear.

            Taken to the extreme, Flannel Guy’s argument would accuse everyone who doesn’t invest in weapons, exploitation, deforestation, tobacco and gambling as not doing enough to make the world a better place (because they would not be making maximum profits in order to help people).
            Because all of those people who made the extra money were planning to donate it to charity, right?

          • Stop crying your tears of joy, Mark. Terry’s reply isn’t so great. It only holds up if you assume petrochemical, tobacco, firearms, coal industries etc. are evil. That leap is a little to big. To borrow Terry’s example, the logic in my view fails when you equate defense contractors to those building “concentration camps in Germany.” I see such firms as these as elements helping a nation to keep its military edge. And those that work in the military forces that such firms support as heroes rich in personal character and integrity, who lie well ABOVE the moral par, not below it. What is sad to see is that such firms are shamed and ridiculed as being enemies of society when in fact their talents prevent the deaths of the men and women who serve. As for tobacco, it’s not my thing, but a free choice for those who choose it (although I’ll admit I’m not a fan of the economic externalities upon health care budgets, and would prefer they pay for their own cancer surgeries). Similar points can be made for firearms, coal, oil, petrochemicals, and the like. And no, don’t try to expand the balloon of externalities: trying to lump every social calamity ever connected with a gun to the firearm manufacturer is not gonna work — particularly when the element of personal choice is the primary driver. Anyway enough said.

  5. Thank you for writing this article. I went through the same moral dilemma recently when considering how I could help change the world into a better place with my money. I work in the finance industry and have put years of thought into how to do so while also considering how I might be able to participate in the monstrous profits of some of the … should I say … less ethical corporations. Hmm… Quite the paradox; right?

    I’ve started writing a book about what I think is “the solution” to the conundrum we currently face and will include the basis of it in this comment.

    I think the fact that people are thinking about ways to be socially responsible shows you that the world is moving in the right direction. I think we should consider socially responsibility in general terms though, rather than in terms of how we can invest our money responsibly; not to discount that positive intent of investment though as that is important. The important thing to acknowledge isn’t with how we invest our money per se, but with how we spend it. It’s time for people to be willing to pay more for a product produced by more ethical means and stop buying discounted goods without regard to how they are produced. Also, when considering “evil corporations” one must understand that the corporation itself, despite what Mitt Romney says, is not a living, breathing, conscious being. Politicians like Romney seemingly desire to help a corporation become (more) evil but I’m going to show you why giving corporations more power isn’t necessarily a bad thing… Remember that Romney’s life revolves around being associated with corporations. Asking him to see that corporations in general are evil is asking him to admit that he is evil. Most people are inherently good, even if misguided and lost in a false reality, and since part of being human is not wanting to criticize ourselves, picketing “evil corporations” accomplishes nothing but resentment from those that control our government the most.

    So … how is giving corporations more power a GOOD thing? Well, before I answer that, let me note that a corporation itself cannot be evil since we know that a corporation reflects the mentality of its shareholders. So … you might say with a facetious eye-roll; are you saying that the shareholders are evil and if so, what creates the mentality of the shareholder then if the corporation isn’t the problem? The answer to that question is that the shareholders’ mentalities are directly correlated to the demand created by the free market. The shareholders aren’t evil; they just want to generate profit. What generates profit? Sales and good business acumen. Who controls price and the total amount of product sold in this “free market?” We do! All of us! Our current spending habits have created corporate greed and a narcissistic business attitude. Our desire to always “get the best deal” no matter what has created an environment where products have to be created in the most cost-efficient manner possible. That creates a cheap product that must be designed to break down or need “upgrading” over and over again to make the economy go through its cycles. Basic economics tells us that demand creates supply and I’ve never heard a rational argument against that. Regardless of how much money the 1% has, they won’t, and really shouldn’t create new jobs if there isn’t a demand from the general public for its product. Not to get off point though and on a rant against trickle-down economics…

    Now to answer the question about why it’s a good thing to give a corporation more power. WE are the owners of corporations. The move away from defined benefit plans to a 401(k) environment has put more responsibility in our hands. We have to take on that responsibility not only as morally-driven members of society but also as owners of these commonly corrupt corporations. How can sleep at night knowing that our businesses are making unethical decisions? We shouldn’t be able to. The time is now to push the shift in corporate attitude. What we do now is the difference between a utopian future or a dystopic one. As owners/shareholders, we have to let our colleagues (fellow shareholders) know that we won’t stand for corruption or unethical decisions any more.

    When the boards of directors of any corporation meet to make decisions to move a company forward they are, again, focused only on what will create profit for the shareholders. When in this mindset of maximizing profit, these board members have to shed their moral compass since, by rule, their primary responsibility is to maximize profit to the shareholder. How do we change this mentality? With our wallets; with our voting privilege; with positive intention. Since maximizing profit is up to the demand of the free market, if we stop putting up with corruption and corporations that don’t treat their employees well, we … all of us … can create an ethical entity. The corporations still won’t be a people (Mitt…) but at least they can radiate a new positive energy and start to make the right ethical decisions with their money, if only to satisfy the shareholders. The will of the paying customer will push this change in mentality from the bottom-up. It is impossible to change it from the top-down since the top thinks things are going well in order to maintain their own sanity and belief that they are good.

    Let me summarize. Since the creator of this blog has shown you that you can’t hurt a company by not owning its stock, only actually create value for less ethical investors; that means it might be BETTER for the world (or…more socially responsible) to actually OWN the stock of the IRRESPONSIBLE companies so that we actually have the leverage. As a shareholder, or owner, of a corrupt corporation, you now have the voting power to change a corporation’s mindset and even transform an unethical company into a forward-thinking one! Imagine what a corrupt S&P 500 monster could do with its cash reserves if it felt wont to do so. This is one way to help change the world; to end the corruption by infiltrating it.

    The other way is that if you’re willing to change your spending habits, you CAN own those currently socially responsible companies so long as you are pushing the public to spend their money at those companies too. I think this is the harder way to make the change though if you had to choose between the last paragraph’s solution and this one.

    So, in my opinion, if we take BOTH approaches, we can have the most success. Spend your money with careful attention to what you are purchasing, but then if the big monster corporation offers a similar ethically-produced quality product as a part of its transformation, don’t be afraid to start to buy again from what was once the evil corporation. You have changed it with your spending habits!

    So, although we should all commend ourselves for wanting to change the world into a more socially responsible place, the path to the path to the road to the destination travels not by investing with only socially responsible companies, but again, by SPENDING your money at them. Why own TESLA stock if you’re driving in a gas-guzzling SUV? When we all start to drive electric vehicles you can bet that Ford will be making a competitive product in the near-future. Create shareholder profitability by always DOING what is right. Invest your money in the broad market. Unethical companies will make the change to being ethical if it increases their profitability. .

    How, specifically, should you invest your money then?

    Simply own the broad market. If you’re knowledgeable enough, own it in a collection of 25-50 individual stocks so that you get more communication directly from the corporations and can play a more active role. Attend those annual shareholder meetings and vote for what’s right. Pass out pamphlets to the other shareholders promoting socially responsible decisions. For those not concerned about ethics, stress the impact social responsibility can have on their future profit. They’ll at least consider voting with you then. If the general population is starting to pay attention to what they spend their money on, years down the road we’re all going to be spending our money at socially responsible companies and they will then be the new juggernauts of the major indexes. We will then have successfully forced the S&P 500 to actually BE the socially responsible investments, and then we can invest in a “socially responsible fund” at a 10 basis point (0.10% to the layman) cost instead of at 1.5% like it might cost now! Added bonus: we’ve made more money along the way!

    You’re already seeing the public’s conscious shift to morality in advertisements by Chrysler and McDonald’s. They’re starting to see that they can actually increase profitability by showing morality. Who knows, McDonald’s might even start to pay their employees more soon and guess what that does? It increases discretionary income, which allows other corporations to increase pay which increases discretionary income even more, in turn allowing all companies to turn more profit and to safely increase inflation while allowing the miracle of compound interest to do its thing.

    When all of this is taking place, volatility will go down and people will start to have faith in humanity. There will be no more people classified as poor, which decreases desperation and fear, which decreases violence and crime, which decreases spending on law enforcement and eventually defense spending, which means we don’t have S&P 500 companies that are there only because they provide the global military forces with weapons. The world moves to a comfortable place. Eventually we have advanced enough technology to sustain a very high minimum quality of life for everyone in the world, and without corporate greed (it doesn’t exist anymore since we won’t let it) to get in the way of positive changes to society, going to work becomes an optional, pleasant experience for those who desire to do so. We end up only needing to work to supplement artificial intelligence. Society can then put its focus on efficiency and advancement in knowledge/technology even more. People stop having to put their faith in dogmatic religio
    ns that cause conflict with other dogmatic religions around the world. Instead, people start to have faith in their fellow man to do the right thing.

    From there, even further down the road, that new positive collective energy and the inquisitive nature we have will help us reach levels of technology where we can spread this new, moral version of humanity to other planets and galaxies.

    I know I got all Neil Degrasse Tyson on you there at the end, but we do have a future, and it’s not a dystopic future if we take the initiative to push ourselves in the right direction.

    Positive intent will change the world into a better place folks, nothing else.

    • StudMuffin1001 says:

      Batman, you are awesome and where can I find your book? … Also, two weeks before I nearly bled to death in a motorcycle cycle accident I awoke from a dream with my the right hemisphere of my brain vibrating. Literally vibrating intensely. it felt as if my mind was translating a thought/feeling and to my surprise I began to hear a crystal clear monotone voice speaking to me endlessly with no pause for breath. I managed to hear a few words “galaxy.. Light.. And you may not be able to understand fully at this moment” … My next memory was awaking in the hospital 3 days after I was struck by a car off my motorcycle thrown over a 100ft and broke both my legs ankles fractured my hip dislocated my shoulder broke my wrist displaced my kidney tore my bladder and fractured my spine…. And well needless to say, after being bedridden, wheelchair bound, on crutches had 4 surgeries (involving metal rods being put in both my legs and wrist ) I was running marathons and continued my pursuits in Bodybuilding despite the overwhelmingly hilarious pessimism around my condition. Anyway, my point….. I don’t think I have one… Just wanted to share. Lol

  6. Stephanie says:

    Here’s the newest from Morgan Stanley: http://www.socialfunds.com/news/article.cgi/4131.html

    I’m sorry to see that our retirements and whether our lawns are green are concerns more important than whether we live on an inhabitable planet.

    Sigh.

    • Stephanie, that looks promising, but there are some reasons I’m skeptical. Granted, I’m not a technical investment analyst. But I find it interesting they talk about returns vs. total value after x years. The expense ratio of the MSCI 400 iShare Index is 0.5%, which is pretty good, but 10x more expensive than a S&P 500 ETF… this will easily eclipse the marginal increased or equal “return” over the long run if I understand it correctly.

      I’m also cynical about Morgan Stanley producing research on their own investment offerings / indexes. The language and stats they use seem a little roundabout, not as direct as they could be if the conclusion was unequivocal.

      And lastly, I would really encourage you to engage with the other half of the argument that equity investing for impact / social change is a dubious proposition in and of itself, before even taking returns into account, especially compared to the “ROI” of direct activism, where I believe there is a lot more good that can be accomplished with a fixed amount of money. And frankly, that’s what we’ve all got… a fixed/limited amount of money and time. How should we invest/donate/spend it to best effect (affect?) the change we want in the world?

      I’m 100% with you about being frustrated and concerned with global warming and other social issues, and I take my individual responsibility and ethics very seriously.

  7. By flannel guy’s argument, could I not justify becoming a drug-dealing pimp (in order, of course, to support non-profits that fight drugs and the sex trade)?

    Suppose there was a neighborhood that could only support 3 pimps and there was a line of people wanting to become one of the pimps, and I had the opportunity to become that pimp and make fantastic money doing it. Do I not have the moral responsibility to become the drug-dealing pimp in order to fight this thing with the money I make? Why let the stock of becoming the pimp rise by removing myself from the competition? Then I would just be encouraging would-be pimps and denying myself the money to do good to fight it. Am I off?

    Second problem I have. As Americans, we assume that money is the solution to many problems (financially supporting well run non-profits). While funding is certainly a need of any non-profit, I think that many people who work in the non-profit world (myself included) would point out that time is a more valuable resource than money right now (broad sweeping generalization, but I think its generally true). For one thing, too much money can create sustainability issues, particularly overseas. The whole thing can come crashing down at some point if its only propped by money. Second, the reason we still have so many of these problems is because (relatively) wealthy Americans are willing to write checks, but they won’t give time and their abilities to the cause. Many parents put a lot of pressure on kids to become something “respectable” like a doctor or lawyer, and not waste their time doing non-profit work that any idiot can do. And surprise! we end up with more idiots over here–all the smart industrious people became engineers and businessmen to support the idiots. Throwing money at problems doesn’t make them go away, and it can makes things worse. If more people were investing their time and careers vs. just money into causes, there would be more progress AND more funding (b/c there would be more solicitation for funds).

    I guess this is just how I see it. I could be totally off here.

  8. One thing I think we are missing in the conversation is cost of capital. If a large enough minority of retail and institutional investors divested of not-so-socially responsible investments, like coal, then the cost of capital for those companies will increase, increasing the cost of borrowing money and limiting growth of those companies. as a publicly traded company the value of your stock in the secondary market does matter.

    Also, the discussion around other investors seeing a deal in vice companies is based on the assumption that all investors are fundamental investors, which we know is not true. a reduction in interest in a stock will harm it’s price to some degree because many institutions and retail, investors act on technical or economic figures rather than intrinsic value.

  9. I would first echo and amplify most of those here pushing back on the conclusions of this post, but go further and point out the fundamentally misguided premises. The author purports to supply a rational, good-intentioned, and most importantly self-evident chain of logic leading to his conclusion. In reality, as Aaron and Ericka so eloquently point out, he chooses to ignore the moral dimensions of the issue, and, in what offends my sensibility the most, purports to know what the economic and business effects of individual investment decisions will be, essentially by assertion. It’s hardly worth the effort to refute each and every point in the logic chain since the conclusion is one of an “inside-the-system-guy” who finds, unsurprisingly, that, just the the Borg in Star Trek, that “resistance is futile”. Nothing could be further than the truth, in my opinion. If you start with a primarily financial approach, in which idealized capitalistic players act with predictable behaviors, and direct financial support of certain causes is unquestioningly weighed more heavily than divestment from others, of course you will find that non-financial considerations will push the result in the wrong direction. The hubris is breathtaking! What I would say to the author is, good for you, you’ve found a way to live with yourself and fund your (early) retirement, but please, don’t presume to have “THE case against SRI”; it is simply A case. “Never doubt that a small group of committed people can change the world. Indeed, it is the only thing that ever has.”–Margaret Mead.

    I might have hoped that someone in the author’s generation showed a little more idealism and a little less self-absorption. Financial independence at any price? Sounds like it to me.

    I agree that many of those who embrace SRI fail to even think things through to the point expressed here, so this is useful to the extent that it causes them to think. But it is the reconcilliation of the inner, moral self with the out-in-the-world self which must be addressed by each person. What I conclude is the best way that I can use my time and my money may be different from anyone else. You may decide that saving lives of Africans by contributing $10,000 that you earned from “sin stocks” to malaria treatment is the impact you can make; I may decide that putting $100,000 into renewable energy investments is the best impact that I can make, even if I don’t get a great return. To pretend that there is one answer is simplistic and misguided.

    All of which begs the question: how well can you do using SRI ideas? Perhaps I’ll invest in rental properties and consider that socially responsible, and not invest in the financial markets at all. Perhaps I’ll invest in a group of SRI mutual funds and ETF’s and be absolutely thrilled when I get 1.8% per year less than the Dow Jones 30, knowing all the while that Chevron and Coke shareholders will have benefitted a little from my investment but that Phillip Morris’ shareholders have not. (I do object strenuously to the notion that it is self evident that investors in “sin stocks” necessarily benefit from my lack of investing in them; by that logic the best thing one can do is, as suggested facetiously above, invest ONLY in “sin stocks”. Simply ludicrous.)

    Could write much more, but enough said. You get the idea.

  10. This is a great article. Thanks for writing as I’ve had some of the same instincts, i.e. to put profits toward things I care about. However your approach seems to neglect a very important variable which is what would happen, long term, to the less ethical companies as people continue to filter money away from them and toward the more ethical businesses. Is the point of that not to eventually put the people out of business whom you are currently invested in? How is that in an investor’s interest?

    ‘Investments’ as consumers need to be taken into account. It is conflicting for me to invest in companies whose goods and services I am not patronizing “over the counter”, so to speak. If I’m going to buy raw kombucha with my dollars instead of Coke, I’m helping to make kombucha companies more profitable as I do nothing to support the soft drink industry. Why would I then go invest money in soft drinks if that’s not what my other financial habits are supporting?

    Presumably one would need to keep a tight eye on the shifting tide and rebalance quite often. But wouldn’t this require some major guessing to make sure you pull out of your less ethical investments before you really lose money? To me, that cancels out the financial peace of mind that your approach is attempting to secure.

    Generally it seems quite a direct conflict of interest to deliberately invest in a company you don’t yourself patronize, whom you are actively trying to steer other people away from, then use your profits to strengthen sectors or businesses whose aim is to put out of business the companies currently invested in. No?

    • Yes, and I would like personally to avoid feeling so “conflicted”.

      I would also add another point that FG’s argument doesn’t take into account, i.e. that even though he correctly mentions that when we buy shares of an “evil” corporation we are actually not buying them straight from the company but rather from other investors, it is this buying (demand) that keeps the share price high and helps keep the company healthy – if everyone suddenly stopped buying shares, regardless of who they were buying from, then the share price would plummet and the company would be in trouble – would it help them to mend their evil ways? Who knows, but even if it didn’t, by my NOT purchasing shares in their company, I am at least doing my small part to rob them of support, in the same way I can do small things around my home to help the environment.

      When we buy stocks in corporations we don’t ethically support, it is a tacit endorsement of the company, regardless of who we buy them from. When everyone does it, it not only helps keep the company healthy, it sends the wrong message, IMHO, the message that we’re all on board with whatever evil thing they’re up to.

      Finally, if missing out on gains over the long run is the primary concern, take a look at the ETF “DSI” by ishares, which has handily beaten it’s S&P 500 benchmark since it’s inception in 2006…I hope that helps put to rest the idea that socially responsible investing “HAS” to return less than non-SRI investing.

      • DSI’s top 20 holdings have a few questionable companies: Microsoft, McDonalds, Verizon, Coca-Cola. I rejected this fund from my socially responsible portfolio. Here’s some other funds: NEXTX, NAEFX, PORTX, PGRNX, PRBLX, VFIIX, BBH, CGW, EVX, FDN, FIW, HACK, PZD, EQIX, FCE/A. This mix generally matches the performance of the DJIA & S&P 500, though the average expense ratio is much higher than Vanguard funds.

  11. Mark LaPointe says:

    When I click on those two fund names, the links take me to descriptions of each. Despite the similarity of names used as the basis for the author’s comparison, the one description says it is growth, the other says it is blend. The one says it is large and mid cap. the other says it is large, mid, and small cap. The defense of socially responsible investing starts the same as that of traditional financial-only investing: One’s comparisons must evaluate similar style box funds. So, the lesson presented is hamstrung. Obviously, in the ten year period evaluated here the market has favored one style/box over the other. The question that would then need to be resolved is whether or not a financial advisor trained in socially responsible investing can put together a portfolio diversified across all style boxes for clients in various age / sophistication / risk categories. They claim it can be done. I’m not saying I agree. But the present brief study was too brief, operating with a common false assumption that doesn’t allow any two funds of any philosophy to be fairly compared to each other.

  12. It is like the bumper sticker:
    “It makes me mad, it makes me angry, it makes me money”

    There are plenty of ways to make your money work for you that does not involve the stock market. Alternatives like AngelList come to mind.

    In the future, I could see buying a few stocks in individual companies I would not feel bad profiting from. Apple and JP Morgan are certainly not one of them!

    I see that that you can somehow feel entitled to reap the rewards of evil companies. It is easy to justify it because “everyone else is doing it”. However, I would feel like a hypocrite. To each his/her own.

    Like 52% of Americans, I may never use the stock market at all. I am fine with that.

  13. I’m so glad to see that others have pointed out the casuistry at work in this piece. By the logic here, if you noticed in your index fund a global company in the business of assassinations, or poisoning poor people, or human trafficking, your only question would be, Is it helping my return?

    But what I want to point out is the misleading interpretative move here. The boogeyman of this article is Vanguard’s FTSE Social Index (VFTX). Take a moment to look this fund up on Morningstar. This is really a large cap stock fund that the author has chosen to evaluate against the S&P. Compared to the large cap benchmark, it has done extremely well, beating the benchmark by more than 2% over 5 years and nearly even with it over 10. The author here puts it in relation to the S&P over 10 years to 2014 and it doesn’t look fantastic, but this fund has actually outperformed the S&P over 5 years. In other words, if you took the advice here four or five years ago and decided to invest in a comparable large cap non-social-screened fund, you’d be doing a lot worse today. And if you picked instead a generic S&P, you would be losing (slightly) against those in this social index fund. The really insidious thing about this article is making people feel like they will certainly be chumps if they choose not to do business with gun manufacturers and polluters and etc.
    And what about the future? Isn’t 10 years a better guide than 5? We don’t know, do we? Maybe, just maybe, as new energy companies come into the mainstream and old energy companies die off or change, the funds that were excluding the polluters will pull away from general funds. I don’t know and this author doesn’t know what will happen.
    I don’t doubt the author was sincere in trying to figure this question out. But he has written a really misleading and (unintentionally) insidious piece that I would call on him to reconsider and withdraw.

    • Hi Frank, I am not as active these days, but I happened to read your comment tonight and just wanted to reply. I think you make a lot of good points. In the article I make a point of saying that the analysis is just anecdotal and probably not especially valid given my lack of professional investment analysis experience. But I still think the are important considerations that make the comparison a little bit more fair. The main one being that this is the closest vehicle for SRI that I could find to S&P500 or total stock market fund. In a realistic world, there would be a SRI fund that was low cost and in the same category as the diverse total-stock-market kind of funds, but at the time of writing, I couldn’t find that fund. You do make an interesting point that the SRI fund has performed better over a 5-year period. Maybe I just picked the wrong period and that would definitely invalidate my analysis. Someone more skilled perhaps could run multiple scenarios over different timelines for a better comparison. My goal here is just to sort of do a quick anecdotal run through of potential reasoning. You make a lot of good points , and while I won’t take the article down, I do hope people read your provocative critique and others as well. Mostly I stand behind the reasoning still and prefer a utilitarian ethics over a kantian or virtue kind of system, although I there is an eastern line of thinking that does tempt me away from strict results-only orientation from time to time. Thanks for commenting.

    • You’ve given me hope, Frank. Thanks! I learned a new word as well: casuistry. 😉

  14. Well, shit, FlannelGuy. I’ve spent the last 2 years researching an SRI portfolio, and have acquired 60% of my 16 targeted funds. Wish I would have read your article sooner. Your best point, in my mind, is that buying stock doesn’t really help or harm the corporation. I didn’t really understand that. At any rate, what I did was to try and find as many SR funds as possible to diversify, yet still perform near the S&P 500. I had to go aggressive and tech-heavy to do that. However, it is impossible to be strict with social screening (and specialization) without running into higher expense ratios. So that will probably cost me in the long run, like you said. Here’s the funds I chose: NEXTX, NAEFX, PORTX, PGRNX, PRBLX, VFIIX, BBH, CGW, EVX, FDN, FIW, HACK, PZD, XT, EQIX, FCE/A. So far for 2017 I am beating the S&P 500 by .2%

  15. This analysis is ridiculous. The author compares an index mutual fund to an ETF and – SHOCKER – the ETF beats the mutual fund. Try comparing VTI to DSI over the last 10 years. What’s that? Nearly identical!! There is no financial sacrifice for dumping the most evil companies. The entire premise of the article is false.

    Just like Warren Buffet recognized intangible value in a company’s brand before the market did (and made a killing), I see intangible value in a company’s sustainability leadership. I sacrifice nothing today, and expect to see socially responsible indexes to outperform on sheer earnings growth as consumers have a growing preference for responsible / sustainable goods & services.

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