Nice concept. Stupid, but nice.Socially responsible investing is the art of investing in companies that are morally upright: no arms manufacturers, no tobacco companies, no companies that have questionable labor practices or pollute the environment, nor companies whose employees surf pornography at lunchtime.
The problem with investing in socially responsible companies is that they don’t actually exist. Medium to large companies, no matter what their field of interest, eventually end up with some kind of litigation against them. Human nature says that if you have 500 employees, not all of them will be angels.
Years ago, when I was in the military, I remember the surprise we all felt when we saw the manufacturers of our equipment: “Don’t they make Barbie?” asked one soldier when examining a trademark on his machine gun. “Hey!” said another, “this landmine is the same brand as my cell phone!”
Since the terms “ethical,” “moral,” and “socially responsible” mean different things to different people, the investment choices of your moral mutual fund may not provide you with the peace of mind you were looking for. In the top-ten holdings of your socially responsible mutual fund you will likely find oil & gas companies, pulp & paper manufacturers, mining companies, banks, breweries and property developers. Wal-Mart famously sells semi-automatic rifles but not pornography: which, if either of these do you consider ethical?
The other major issue with socially responsible investing is, of course, the returns. Finding nice companies that stay nice takes a lot of time and effort, and therefore a lot of stock switching (causing high taxation) and high management fees. My $200 socially responsible mutual fund, purchased when I was in high school, has yielded an annual return of about -.02%. The only reason I don’t sell it is because I couldn’t be bothered to pay the transaction fee. And besides, it amuses me to see it there, performing pathetically.
My recommendation is to stop trying to find “clean” companies, and instead choose your vices carefully. If you drive a car, consider purchasing oil stocks. If you wear jewelry, consider a gold or diamond mining company. If you use a computer, consider an electronics manufacturer. If you use fertilizer in your garden, consider a chemical manufacturer.
You are directly supporting these companies anyway – you might as well make money with them.
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“If you pretend to be good, the world takes you very seriously. If you pretend to be bad, it doesn't. Such is the astounding stupidity of optimism.” Oscar Wilde
