Friday, January 12, 2007

Socially Responsible Investing/Socially Conscious Finances: Tough Questions

There are a lot of questions and critiques of socially responsible investing (SRI) and other socially conscious financial approaches, and I don't want to run away from them because I think there are good answers (or at least a good discussion to be had) for most. Here are some tough questions I've heard; feel free to tack on your own in the comments if you think I've missed any.

This is Part 4 of a semi-organized series; see also Part 1 (the basics), Part 2 (some specific SRI options), and Part 3 (the diverse motivations for SRI).

Don't you end up financially worse off if you're a socially conscious investor?

  • Maybe yes, maybe no. Socially conscious mutual funds get roughly the same returns as other mutual funds, although obviously there's wide variation, and it's more challenging to diversify if you're SRI-only. (Here are some studies on the question.) Community development banks typically provide lower returns than conventional banks, but the margin varies from very small to significant.

Why not try to end up with as much money as you can and then give a lot to charity?

  • This is a personal choice, but there are a couple of reasons I do it.
    • Some are more philosophical and general: I believe in the fundamental concept of involving social values in financial decisions, and I think we'll all be better off if that approach grows.
    • But I also believe that in some cases, especially with options like community development banking, participating may actually provide greater benefits than giving to charity. For example, say I have $10,000 in a community development savings account/CD/money market account at 2%. (My MMA, at Domini, is actually over 4%, but not every option is that close to the highest rates.) I could put that $10,000 in an high-interest online savings account and make 5%. Over the course of a year that's a difference of $300. Is there more benefit in giving that $300 to charity, or making $10,000 available to be invested in financially under-served communities? On the one hand, one has to be repaid and the other doesn't; on the other hand, we're talking 33 times the amount of money.

You buy stock from other shareholders, not the company, so why would the company care whether you own their stock or not?
  • The CEO, top management, the board, etc. have lots of stock options, so even if the "company" doesn't care about the stock prices, the actual people running it do!
  • The company's responsible to shareholders for results-- ie, higher stock prices.

Well, I don't believe that avoiding bad actors' stock even affects the prices at all-- so many investors are out there that when socially conscious investors avoid a stock, others will see a great bargain and snap it up. So what social benefit would there be to get involved in SRI?
  • Shareholder advocacy! If you own stock in a company, you can vote on proxy resolutions that urge companies to be more socially responsible. Socially responsible mutual funds, backed by the strength of how many shares they own, can enter directly into dialogue with companies to effect change.
  • Building awareness and affecting others. The more people participate in SRI, the more friends and family and neighbors and coworkers will hear about it, and the more news coverage and blog posts there will be about it.
  • An SRI effort to avoid a company often leads to bad PR (which no one likes!) And that bad PR might lower the stock prices indirectly, even if your socially conscious avoidance of the stock doesn't do so directly.

Don't many SRI mutual funds invest in companies that are pretty lousy? Aren't they just picking the lesser evils?

  • Basically, yes. It's hard to get away from this. If you look at any SRI fund's holdings, you'll probably find at least a few companies that make you gasp and cringe.
  • But the one benefit of owning stock in questionable companies is the aftermentioned shareholder activism-- the leverage to push them to change. Take a look at the work the mutual fund is doing to improve the problem issues with that company before you decide to write the fund off. Then if you still feel uncomfortable, you can try to find a better one. (Good luck! And I mean that in all earnestness!)
Doesn't SRI just help corporations "greenwash," by pushing for and praising small changes and therefore deflecting attention from deeper problems?
  • This is the eternal question/dilemma, and it's bigger than SRI. Do you encourage and reward small steps because they're movement in the right direction, or does that just lower the bar and decrease the chances of bigger change? There's no easy answer.
  • I can say that although this is probably true in some cases, there are other cases where serious, substantive change has occured thanks to SRI. The biggest and most often cited is ending apartheid in South Africa, which SRI divestment campaigns contributed to. But there are many other examples that are real and meaningful if not so dramatic.
  • In the end, it comes down to what you feel comfortable with. As for me, I'm alright with "some progress," at least for now. And I'll work towards the bigger, deeper changes through methods outside of my financial decisions.

What if I don't believe in corporations and the stock market at all? Corporations have a singular focus on profit to the exclusion of all other values. And instead of siphoning off profits for distant stockholders, that money should go to the workers and/or lowering prices for consumers. Why should I participate in a system I oppose?

  • Maybe you shouldn't. There's a lot to be said for keeping your financial decisions consistent with your principles, regardless of whether that accomplishes anything or not. And although just one person avoiding the stock market won't cause it to collapse, every movement and social change is made up of a lot of individual choices building on each other. (The stock market isn't the only form of socially conscious investing, though-- take a thorough look at community development financial institutions.)
  • That said, I happen to agree with the hypothetical "you" asking the question, and yet I still own mutual funds invested in the stock market. I do feel conflicted about supporting systems I oppose. Here are the reasons I do it anyway:
    • Having my retirement savings in the stock market means I'll end up in better financial shape. To some extent, this is just personal "selfish" materialism; however, I also think about it with the rationale that the more secure my retirement becomes, the more freedom I will have to do the work that I feel is most meaningful and makes the most positive change in society, regardless of how well it pays. (I've explored some of my thoughts and feelings about this here and here, on whether this is a rationalization and a cop-out or a valid approach. No answers yet!)
    • The mushy middle. I'm in the stock market for retirement, but not for my sizable medium-term savings. I invest in mutual funds, but ones that have higher fees/expenses thanks to their social screening and shareholder advocacy. I'm torn by conflicting desires to make more money and be consistent with my values, so I stake out turf in the middle.
    • I also believe that, as a matter of practicality, it will be easier to convince the general population to integrate social values into financial decisions than to toss out corporations and the stock market altogether; my participation in socially conscious stock-market investing helps promote the former approach whereas avoiding investing altogether promotes the latter. (Of course, there's certainly a case to be made that developing a more "palatable" corporate/stock market system helps shore up the system even more and actively works against broader, deeper change. But I personally don't buy that comprehensive changes are likely anytime soon regardless.)

What if I believe that "the social responsibility of business is to increase its profits" and that social values just don't belong in these kinds of financial decisions?
  • Then I guess we disagree entirely, and I haven't the space or inclination to argue the point here. I would be more than glad to do it another time, though, if there are any takers-- we could have a thorough back-and-forth, posted on my blog (and yours if you have one).

So, what have I missed? Any other tough questions to throw at me?


S/100/30 said...

What a great summary.

As I discussed on my blog (yours doesn't seem to allow non-blogger trackbacks?), I think there's a counter-response to this response of yours:
Shareholder advocacy! If you own stock in a company, you can vote on proxy resolutions that urge companies to be more socially responsible. Socially responsible mutual funds, backed by the strength of how many shares they own, can enter directly into dialogue with companies to effect change.
The problem is that many people invest in a SRI account within a company that's not necessarily SR (e.g. TIAA-CREF), and therefore the proxy rep at the shareholder meeting isn't necessarily making SR votes.

BrookfieldCT said...

We are in a hurry. The hurry is: we humans are in the process of destroying our planet. Global warming is the single most significant environmental crisis the world community has ever seen. The 2007 G8 Summit in Germany will focus on the reversal of global warming. President Bush, of course opposes this proposal. Like his strategy in the Middle East, he has a better idea, and he wants to convince the world of something they already know is untrue. This time it’s not that there are weapons of mass destruction in Iraq, but that global warming is not that dire an issue.

Our Nero-like President fiddles, but we cannot allow our Rome to go up in flames. This isn’t a city’s destruction we speak of. It is the end of all of us, of history, of every thought and feeling humankind ever produced. Our present federal government is not going to do anything about this crisis.

Our company, Connecticut Real Estate and Construction wishes to do something about it, because Connecticut needs workforce housing in significant number for very important reasons. Suburban sprawl is killing the environment. When we continually clear off two acres and more per household to put up large houses, we cut down trees which produce oxygen, we deplete the filtering system for our water, and we make houses which leave a carbon footprint which further opens a hole in the ozone. If we instead build multiple units together and build them with solar photovoltaic cell panels and with geothermal heating and cooling, we leave virtually no carbon footprint, we leave sufficient greenery to filter water run-off, and we provide our workforce with housing that allows them to stay in the state and not flee to the South and Southwest as has been the recent trend. As a result, those businesses (and their tax revenues) which require those workers need not flee with the workforce, a trend we have seen throughout the Northeast region of the country.

Additionally, we will build elderly housing. The Boomer Generation is aging. They are retiring at record rates and require specific housing that does not exist in sufficient number. We will build it. We will build commercial buildings and office space to go along with the elderly and workforce housing. We need cooperation from local governments to achieve our goals, and we need that cooperation quickly. As we move forward, we will build with town tax rolls in mind. We are aware that the workforce housing will require significant services and expenses, most notably educational expenses. This is why mixing the elderly housing with the workforce balances the ledger, for the elderly pay taxes without sending children to schools. Further, the commercial and office buildings will bring in significant tax revenues without pulling out revenues from the local municipality. This formula is referred to as “Smart Growth” and is to be part of our plans.

While proposing “caution” and “care” is never foolhardy advice, studies on these issues have already been done and “smart growth” is necessary throughout the state. We cannot wait. The cost is too dear for all of us to sit idly by and fiddle away time as the planet goes up in flames.


Miles J. Shapiro, Partner
Connecticut Real Estate and Construction
VP Marketing and Commercial Real Estate

sweetzer said...

i've been following your blog for months now, and have read all (i think) of your sri-related posts. i feel stuck with where i'm at right now but i figure the more we write about it, the more people read and the greater chance we have of helping others make good decisions.