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?