Is Socially Responsible Investing Possible?

One of my most vivid memories of this past holiday season was relaxing around a square table with family casually chatting about politics.

I was probably enjoying my second chocolate chip covered cannoli when my cousin halted the debate over changes in a local recycling program and friendly jabs at 2016 presidential hopefuls.

“I have a serious question, and I'm looking for your advice. I'm starting a new job with a retirement plan, so I need to know, is socially responsible investing possible?

There may have been a few bursts of nervous laughter, but I was hesitant to spit out a quick reply. Quite honestly, I hadn't given it a great deal of thought.

It had been months since I invested any extra money and my portfolio consisted mostly of low-maintenance index funds. 

Now that I'm employed full-time again, and I've waded back into investing, I've wondered the same thing as my cousin.

I'd like to think I'm a socially-conscious consumer, allowing my hard-earned dollars to be my voice for or against like-minded businesses. And my voice may seem small and insignificant, but should that hinder my efforts of striving to be better? Should that same mindset apply to investing?

Short answer: it's complicated.

What is Socially Responsible Investing?

Not everyone's definition of socially responsible investing (SRI) is the same.

Generally speaking, socially responsible investors seek to invest in companies that share their values. There are many issues of concern, however, they can generally be summarized as “Environmental, Social and Governance” or ESG investing. Additionally, many of these investors care deeply about shareholder advocacy and community investing.

With US sustainable, responsible, and impact investing ballooning to $6.57 trillion by the start of 2014, more individuals that ever are concerned about contributing to a more sustainable and equitable economy.

There is even a detailed method of screening securities based on certain ESG investing concerns, but are investors making the impact they think they are?

Bloggers Weigh In

Jason from Dividend Mantra recently dug into ethical investing and pointed out how difficult it can be to find a company whose practices you agree with 100%.

He also argued how limiting it can be to eliminate certain companies from your portfolio. He questions how much we should allow our ethics should cost us.

John from Frugal Rules also tackled socially responsible investing recently. In his former career, he was often asked to help investors find socially responsible funds.

He describes the amount of work that is required to research a fund made up of hundreds of companies or even more frustrating, the number of companies within a conglomerate. Despite these challenges, John believes socially responsible investors will ultimately be happier with their portfolio.

Bogleheads Discuss

One of the most interesting and informative resources I stumbled upon is a Bogleheads forum thread discussing socially progressive fund options.

The entire thread is worth reading, but here's the gist – a gentleman is discussing his plan to max out his Roth IRA, however, his wife insists it only consist of “progressive industries.”

While many commenters acknowledged that this strategy may not be the most effective method in which to enact change, they were empathetic to his wife's concerns about making money from businesses that she doesn't agree with.

The commenters made some interesting recommendations:

– Government bonds
– Peer-to-peer lending
– REITs
– CDs from a local, insured credit union
– Individual stocks from the top socially responsible companies in the S&P 500

A few commenters pointed out that his wife may be better off investing in the total market, maximizing returns, minimizing expenses, and then donating a portion of their earnings to charity.

Investing is Personal

Ultimately, the choice to practice socially responsible investing is personal. Investors should assess their own comfort levels and attempt to make the most informed choices possible.

As Jason succinctly puts it, “No amount of money is worth being uncomfortable, in my opinion. If you can’t sleep at night, you’re doing it wrong.”

Readers: Do you think socially responsible investing is possible?

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Discussions — 13 Responses

  • JC April 8, 2015 on 7:55 am

    I think SRI isn’t worth the hassle. For one, if you have a problem with alcohol that means you can’t invest in most restaurant companies since they serve alcohol. Or what about people having issues with O&G companies but driving gas/diesel vehicles or using just about any plastic product. Or most technology hardware companies, including smart phones, being reliant on the mining industry. And hopefully you don’t find an issue with 3M because you’d be hard pressed to find a company that doesn’t use some of their products. The lines are just too blurry to try and make distinctions and you’ll probably have to spend an absolutely ridiculous amount of time to research all of a companies operations and business relationships.

    A big factor that I think gets missed, although not surprisingly, is that just because you invest your capital in a company that doesn’t mean your money ever hits their bank account. Unless you buy directly through a debt offering, IPO, or secondary offering you technically aren’t supporting the company financially. Purchases made on the stock market go to the seller of the security, not the company.

    I think the best route is to come up with an investment plan that will allow you to reach your financial goals. Whether that’s option trading, index investing, dividend growth investing, growth investing, value investing…and then use your proceeds to fund whatever causes you feel should be addressed. I wouldn’t say that someone should or shouldn’t invest along with their values because they are the one that has to live with their decisions, but for me I don’t take that into account.

    Reply
    • Roadmap2Retire JC April 8, 2015 on 8:30 am

      I think JC has summarized it well. Investing is a hard enough matter and when you pick and choose to a small subset, you are limiting yourself and actually putting your capital at risk. You are better off investing and then taking the proceeds to support your causes.

      Nice post and thanks for sharing.
      R2R

      Reply
  • FI Fighter April 8, 2015 on 9:13 am

    Great responses above… As investors, we are all trying our best to take care of our own finances so that we can literally buy TRUE freedom. Everyone draws the line in the sand at different spots, but I would focus mostly on that one underlying objective first – financial freedom.

    Once you’ve secured your own freedom, you’ll have so many more opportunities (time and energy) to make a difference in the world and give back in so many different ways. I’ve always believed that it’s best to take care of yourself first before focusing primarily on others. Your impact will be much more profound as well. Maybe it’s tough to admit, but money does make the world go round. If you have more of it to throw around, you’ll definitely have more power to influence change. That, and it’ll be a lot easier to get someone’s attention 😉

    Reply
  • Dividend Mantra April 8, 2015 on 12:43 pm

    Kate,

    Thanks for including me!

    I agree with the above comments. It’s incredibly tough to effectively mix ethics and investing. But, in the end, it’s really an individual call as far as what someone is comfortable with.

    JC is right in that you’re not really “supporting” a company by buying its stock. However, I think most people care less about that and more about just owning a piece of a company whose actions may not be agreeable.

    Best regards!

    Reply
  • John @ Frugal Rules April 8, 2015 on 1:21 pm

    Great discussion and thanks for including my post Kate – I really appreciate it.

    I believe SRI is good, in theory, but there is just so much that goes into it that it really isn’t something that’s viable, for most, in my opinion. There are just too many conglomerates out there and funds that might hold a questionable holding that cause it to be not worth the hassle. At the end of the day, you just need to make the most informed decision possible as an investor and realize that it is a very personal decision as you pointed out.

    Like JC pointed out, unless you’re getting in on an IPO or secondary offering then you’re not financially supporting the company. Many overlook that and see their purchase of X or Y stock as supporting said company. All that being said, I’d agree with Jason that if you can’t sleep at night then you likely need to change something.

    Reply
  • Melissa @ Sunburnt Saver April 8, 2015 on 5:42 pm

    It would be really awesome to find a mutual fund with all stocks that I agree with, but I’m not entirely sure that’s possible. In fact, I even own stock in a company I actually hate – but it’s incredibly profitable for me. It’s not Apple-profitable, but it’s pretty darn good.

    Plus – conundrum! – this company is investing in some socially responsible things, like solar power, that I like. So would I sell the stock because I hate most of what the company does, or should I keep it because occasionally they do the right thing?

    My answer: make a bunch of money, sell, then donate to charities that I love. And until I sell that stock, continue my regular donations to charities and causes I support. It’s my way of handling socially responsible investing 🙂

    Reply
    • JC Melissa @ Sunburnt Saver April 10, 2015 on 5:06 pm

      Melissa,

      You can try out Motif Investing if you have 30 or less companies on that list. Fairly new brokerage so who knows what changes are in store but as it sits now you can pick up to 30 companies and create your own ETF/MF. I think it’s about $10 per trade so you’d need to invest at least $2k each time to keep your expenses at 0.50%. But it might give you the flexibility you’re after.

      I know there’s some other bloggers that use it but I haven’t gotten around to it. But it’s something to look in to.

      Reply
  • M from There's Value April 9, 2015 on 7:15 am

    I personally think it IS possible to invest in an ethical manner. There are a few things you need to consider first though, such as what are your absolute no-go areas e.g. tobacco and gambling for me. I exclude these from my monthly stock screener. However, I am sure most people have some areas that are a bit grey, so it wouldn’t matter too much.

    And as to JC and Jason’s comments about not supporting the companies just because you own their shares, I think that view is quite incorrect. If you buy shares in a stock, you want that stock to keep returning you regular and/or growing dividends, or you want them to grow the value of the stock so you can sell it at a good profit. Either way, you hope to make material gain out of owning a tiny portion of that particular company, so you want the company to do well i.e. you are a supporter of that company. There are no two ways about it I’m afraid.

    Moreover, just to remove certain companies from your possible investment choices is not particularly limiting, although that would depend on which industries/sectors/companies you would not like to invest in. However, there are literally hundred of thousands of businesses to choose from, then you’ve got UK, Europe, Asia, etc. etc. where you can also invest. So in reality, not that limiting either.

    I wrote about this topic back in September:

    http://theresvalue.co.uk/morals-and-investing-can-they-be-balanced/

    and wrote my article because I was inspired by Steve from Kapitalust’s article, which spawned a discussion:

    http://www.kapitalust.com/balancing-ethics-and-investing/

    I hope you find these two articles interesting and that they contribute to your thoughts on the matter.

    Cheers

    Reply
    • JC M from There's Value April 10, 2015 on 5:01 pm

      I still don’t see it as supporting the company. It’s more like recognizing an economic advantage, whatever that may be, and capitalizing on it. There’s a reason tobacco companies are at the top of the lists of highest compounders over the last 50 years or so. And that’s despite declining numbers of smokers.

      I’d say it’s similar to how in baseball if you notice a pitcher tips his pitches or if you play poker and notice a tell from another player, you wouldn’t go inform them of that would you? Sometimes the economics are just too powerful and recognizing that can be very rewarding.

      I just feel that, as investors, people would be better off donating time/money to whatever causes they feel worthy. That will have a bigger impact than not investing in a company that is a proven winner. No company is going to be upset if one person or even hundreds of thousands of people don’t want to invest in them.

      Of course if someone chooses not to invest in a specific industry or company for any reason, moral or otherwise, I can’t fault them. If it bothers them with owning a company that might go against some of their own moral standards then it’s best to move on to another company. There’s thousands of companies you can invest in and an infinite number of companies you can start on your own if you can’t find any that you completely agree with.

      Reply
  • Stefanie @ The Broke and Beautiful Life April 9, 2015 on 7:29 am

    I was recently assisting at an event that had a panel on this. Apparently socially responsible investing is huge among millennials. I think it’s tricky because where I might agree with a company on one point- what they sell and promote and their social policies, I might not agree on another- outsourcing labor to China with terrible conditions.

    Reply
  • Justin @ Root of Good April 9, 2015 on 8:48 am

    I don’t personally try to be socially responsible in my investing. I just buy index funds, so the good and the bad (whatever they are) are already in the mix.

    I think SRI is a challenging proposition anyway, since I personally think oil companies provide an important service (as long as people like to drive and fly and buy stuff transported by truck, train or plane!), and casinos and strip clubs provide entertainment, alcohol companies let us have a good time, etc.

    I’ll stick with making ethical choices in my real life and let the markets run my investments through index funds. 🙂

    Reply
  • Melanie @ Dear Debt April 13, 2015 on 4:23 pm

    What a thought-provoking article, Kate! These are very important things for me to think about when I finally get serious about investing.

    Reply
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