Last year we wrote an article about Ethical Consumerism, the practice of spending your money on businesses who support your ideas of a healthy community and environment.
In addition to where you spend your money, you can also put a lot of thought into which investment vehicles agree with your personal ethics. This is something weighing on my mind as I start from scratch learning about investing as a whole (see my previous article on the subject: What Do I Know About Investing?). There are a few different strategies, as I see it so far:
Invest in things you think will succeed, regardless of your own ethics
One of my co-workers is the sort of person who eats well, exercises all the time and generally treats his body as a temple. When I asked him if he ever does any investing, he quickly answered, “Only in the Vice Fund”. The Vice Fund invests in alcohol, gambling, tobacco and aerospace and defense industries. You could think of it as the “World is Going to Hell Fund”. The way I see it, investing in something with that kind of mission statement is akin to hoping other people keep destroying themselves.
For a guy who treats his own body as a temple, this seems like a weird contradiction, but as he tells it, the fund has been very lucrative for him, excluding 2008.
A similar example might be a vegetarian with a lot of stock in Burger King. Doesn’t make a whole lot of sense, except it could be quite profitable.
Invest in things you wish would succeed
For example, I wish that solar, wind and geothermal energy would succeed, and if I believed my Fifth Grade teachers, by 2009 those are the only sources of energy we should be using. I’m not particularly opposed to oil and coal because they’re dirty and they may be funding who-knows-what kind of overseas operations; I’m opposed to them primarily because they are finite resources. Eventually we will run out, and we may as well start weaning ourselves off of them now, because of the other environmental and political reasons. But do I think all humans will stop using oil and coal by the time I should be retiring, in about 30 years? I’m not sure.
Hedge your bets
Well, there’s one method of hedging your bets, which is to invest both in the things you think are successful-but-harmful, and in the things you think would benefit the world if only people saw things the way you do. But this doesn’t seem like a strong, long-term strategy to me. One of them will eventually fail. Thankfully, there’s another nuance:
The oil giant Shell is following BP and releasing a bunch of commercials highlighting how they’re committed to refining new ways to power things. This reminded me of another transition that shook up some companies: when photos moved from film to digital.
Nikon, for example, cruised along for decades making some very good (and some very cheap) film cameras. When computers became fast enough and connected enough, people started sharing their photos digitally and demand for digital cameras grew. Not willing to let a different company take their market share, Nikon became expert at making digital cameras as well.
Oddly, I don’t hear the names Kodak and Polaroid as often as I used to, though I know they’re still around.
Today we think of Exxon and Shell as “oil companies”, but they may very well position themselves as leaders in the geothermal energy space in the future. Here’s where my earlier advice about doing lots of research come back into play.
Further reading
Consumerism Commentary has written many, many articles about investing in the past. Flexo is a lot more knowledgeable than I am, so far, but I hope to catch up soon.
Published or updated January 30, 2009.
{ 7 comments… read them below or add one }
This has been a live issue for me in the past couple of months.
My partner, who is very ethically minded, was finally ready to start committing to a long-term investing strategy in an index fund.
I was surprised when she realized late that an index fund meant she’d be putting money, theoretically, into oil companies and arms manufacturers as well as supermarkets and similar.
After spending so much time discussing the merits of cheap index tracking with her, it pains me to see her going off to investigate actively managed ‘ethical’ funds to avoid this, especially as the benchmark of ethical is so wooly.
Personally I think you have to take a realistic view. I don’t directly buy stocks in tobacco or arms companies, for instance, but I wouldn’t miss out on the benefits of passive index investing – there are other ways to make your point with your money, that are less potentially damaging to your wealth.
I think this is a tough call. In the past year or so, I’ve really tried to support companies who are involved with causes I believe in. I do this by purchasing items from companies whose values or at least practices seem to coincide with my own goals. Investing is trickier for me. Often what appeals to my ethics isn’t what’s profitable, and isn’t that a large part of the purpose of investing? I’m not sure where I fall yet. The little bit of money I currently have invested is in index funds.
Interesting topic to bring up.
I can understand this being a major issue for a lot of people. But if it’s not, I don’t think people should get on those people. Either way they invest they are looking out for them and their future.
Regarding “Invest in things you wish would succeed” – that’s not my favorite strategy unless you’re super rich. Most of us will not make a meaningful contribution by buying a few shares (or even a few thousand shares) of stock in an industry we believe in.
If you’re doing it for emotional reasons that’s one thing. But as an investment strategy I think you should reserve that philosophy for your risky money.
Most of us can probably make a better contribution to a cause we believe in by volunteering and spreading the word.
If you invest in things you think will be successful, you’re more likely to have financial freedom and the ability to help your favorite cause. I’m not saying invest 100 % in the vice fund, but maybe just do some plain-vanilla textbook investing and volunteer your time or other resources for the causes you value.
I thought about this long and hard, and concluded that avoiding companies based on these sorts of issues is counterproductive. You are better off investing optimally, then directing the returns to the causes you support.
If you boycott a stock like Exxon, you are artificially depressing the price a little bit, which means that someone else who buys the stock instead, and doesn’t have your compunctions, makes even more profit. There is no feedback mechanism for Exxon to connect your personal boycott with their actions, so in practical terms all you are doing is denying yourself some investment income.
It seems far more effective to buy the stock, then use the profits in an ethical way — support the companies, non-profits, and charities that further your aims. Think about the irony of cashing your Exxon dividend check and donating it all to Greenpeace (or whatever your favorite example of good and evil is).
There’s also the practical concern that none of the social funds I’ve seen use screening criteria I’m satisfied with, and they seem to take companies’ statements at face value without any sort of investigation into what really goes on. By contrast, there are transparency mechanisms to see that your donations to non-profits and charities are being used as you intend.
Interesting points about ethics, values, and investing.
I got interested in ethical investing some forty years ago as I believed that when we invest in a company we share in the responsibility for the activities of the company as well as participate in the outcomes of the company’s activities. Therefore anyone valuing their personal or spiritual growth has to take these things into account when investing.
I also believe that if everyone does invest according to their personal values, then, since so many of core values are alike — and are supportive of higher ideals — that in the long run, only companies employing these higher values will truly prosper.
I do believe in investing in companies that support what I believe in or what I want to see. There are alternative energy index funds like PBD and PBW for example. I think we have to do the best we can but it seems a little incongruous to be a vegan and preach about higher consciousness and then, as you say, invest in Burger King. I think it’s fairly likely that Exxon Mobil will, at some point, be right up there in producing energy from alternate sources but they’re not there yet. There may be funds that do better but I’m the happiest with any little rise in the ones in which I truly believe. Admittedly not the best financial plan!