Investment Workshop 43: Socially Responsible Investing

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Today I’d like to talk about Socially Responsible Investing or SRI as the cool kids call it.

It’s a topic that’s been getting a bit of buzz lately, having being mentioned by Jim “The Godfather” Collins in his latest stock series post and having been the topic of heated discussion at Chautauqua UK.

What is Socially Responsible Investing?

The topic of Socially Responsible Investing tends to come up when something bad happens in the news. For example, right now people are debating about it because all the hurricanes hitting the States is causing people to question whether we should be investing in companies that contribute to climate change. Before that it was the Sandy Hook shootings that were causing people to question whether it was ethical to own gun companies.

So what is Socially Responsible Investing and how does it try to address those issues?

Basically, SRI is an investment strategy, made available to the public as either a mutual fund or an ETF, that only invests in companies that meet a specific list of requirements for ethical behaviour.

And what is that specific list of requirements you might ask?

Beats me.

And that, right there, is the reason why SRI, while in theory a good idea, kinda falls apart when people actually try to implement it. The line of what’s considered “acceptably ethical” and “unacceptably unethical” is completely open to interpretation and varies from person to person.

For example, while it’s relatively easy to say that a company who dumps chemicals that poisons innocent civilians has engaged in unethical behaviour, but once you start down that path you quickly slide down a rabbit hole.

Is a defence contractor that builds guidance systems for weapons systems engaging in unethical behaviour?

Is a fast food chain that sells unhealthy high-fat food that contributes to heart disease engaging in unethical behaviour?

Is a company that closes down a plant in one city and moves it to another country to save money engaging in unethical behaviour?

On any of these questions it’s possible to argue both for and against the question of whether that’s ethical or not, and if I were to poll 100 people I would likely get a pretty wide range of responses. And it’s this variability on the definition of what a “Socially Responsible Company” is that causes problems.

If a fund or an ETF has a clear, unambiguous mandate like “Buy every company in the S&P 500,” then it’s relatively easy to verify that the ETF is doing what it’s supposed to. Just pull up it’s price performance on a chart and overlay it against the underlying index. However, if a fund or ETF’s mandate is open to interpretation by the fund manager, then that’s an actively managed fund. The fund manager is actively buying and selling stocks based on whatever criteria they come up with.

And we know that actively managed funds tend to underperform passively managed index funds because of the impact of higher fees, the tax impact of continuously buying/selling equities, and the general inability of active fund managers to consistently outperform the index.

So that’s why we don’t implement Socially Responsible Investing ourselves, nor do we recommend it for any of our readers. First of all, because SRI funds invest based on the fund manager’s interpretation of what a Socially Responsible Company, there’s no guarantee that THEIR interpretation of Socially Responsible matches YOUR interpretation of Socially Responsible. And second of all, SRI funds are basically just another actively managed stock-picking fund, which we fundamentally don’t believe in as an investment strategy.

That being said, don’t interpret this as saying that you should just accept that bad companies will do bad things. But I’d argue that the stock market is the wrong platform to try to make your voice heard. The stock market isn’t designed to be a popularity contest, or a way to police what a company does or doesn’t do. The stock market was designed to figure out how much a company’s worth and provide a place for people to buy and sell shares in said company. That’s it.

If you disagree with a company’s product or their business practices, exercise your right as a consumer in the free market and don’t buy that company’s stuff.

If you believe a company is acting unethically or illegally, bring that behaviour to the attention of the criminal justice system or the news media.

If you believe the laws allowing companies to continue acting unethically need to change, become involved in the political process and vote for a political party who will pass laws regulating that behaviour (or run for office yourself!)

Those platforms are there for exactly this reason. Those are the platforms you should use to make your voice heard.

But the stock market? Use that to help you retire. After that, you can spend your time doing the other stuff.

And on that note, we shall now proceed with this week’s buys.

Canadian Portfolio

We begin as always by adding cash into our portfolio and seeing where we stand.

AssetTickerUnit PriceUnitsMarket ValueAllocationTarget Allocation
Canadian BondsVAB$24.97151$3,770.4737.87%40%
Canadian IndexVCN$30.6562$1,900.3019.09%20%
US IndexVUN$42.4144$1,866.0418.74%20%
EAFE IndexXEF$28.6353$1,517.3915.24%16%
Emerging MarketsXEC$25.8515$387.753.89%4%

Then we figure out what we need to do to get back to our target allocation

AssetTickerTarget AllocationUnit PriceCurrent Market ValueTarget Market ValueCurrent UnitsTarget UnitsDifference
Canadian BondsVAB40%$24.97$3,770.47$3,982.57151159.58.5
Canadian IndexVCN20%$30.65$1,900.30$1,991.286265.03.0
US IndexVUN20%$42.41$1,866.04$1,991.284447.03.0
EAFE IndexXEF16%$28.63$1,517.39$1,593.035355.62.6
Emerging MarketsXEC4%$25.85$387.75$398.261515.40.4

And finally, we decide on what orders we want to put in being careful not to go into margin…

AssetTickerUnit PriceActionFractional UnitsUnitsProceeds
Canadian BondsVAB$24.97BUY8.58$199.76
Canadian IndexVCN$30.65BUY3.03$91.95
US IndexVUN$42.41BUY3.03$127.23
EAFE IndexXEF$28.63BUY2.63$85.89
Emerging MarketsXEC$25.85BUY0.40$0.00

American Portfolio

And on the American side we do the same. We add in the cash and see where our portfolio stands…

AssetTickerUnit PriceUnitsMarket ValueAllocationTarget Allocation
US IndexVTI$128.2823$2,950.4428.02%30%
International IndexVEU$52.8757$3,013.5928.62%30%

We then figure out what we need to change to rebalance our portfolio

AssetTickerTarget AllocationUnit PriceCurrent Market ValueTarget Market ValueCurrent UnitsTarget UnitsDifference
US IndexVTI30%$128.28$2,950.44$3,159.422324.61.6
International IndexVEU30%$52.87$3,013.59$3,159.425759.82.8

And finally we decide on our unit orders being careful not to go into margin

AssetTickerUnit PriceActionFractional UnitsUnitsProceeds
US IndexVTI$128.28BUY1.61$128.28
International IndexVEU$52.87BUY2.83$158.61

And with that, we’re done for this week. Thanks everybody!

Continue onto the next article!

28 thoughts on “Investment Workshop 43: Socially Responsible Investing”

  1. An interesting debate for sure. Perhaps rather than looking at what companies NOT to invest in from an ethical standpoint, it might be more of a compromise to instead dedicate a small amount of your portfolio to specific ethical investments based on your beliefs.

    I’ve always thought green energy investments are ethical and also, hopefully, the future of the energy sector. I believe there are some green energy ETF’s you can buy into (expensive fees though) or you can simply buy into some green energy companies as you see fit. It’s actually quite fun and it does make you feel a bit better about the unethical investments you might be holding in your regular ETF’s.

    1. Yeah, or fund them directly by buying their stuff. I’m not convinced that buying a company’s stock actually benefits the company itself. You just trade units from someone else.

  2. I personally treat my liquid investments completely separate from social responsibility issues.

    It’s our consumer behaviors and where we put our money that matter the most. Which will drive how companies and businesses do things.

    As a vegan, you will be seeing future consolidations of meat companies due to the increasing vegan consumptions. 1. Shrinking balance sheet of meat companies could result in 2. stock buybacks and rising EPS and I will then be 3. using those gains to support more vegan products. It’s a win-win-win for me as a vegan and investor.

  3. Great debate to have, this one. You could get even deeper into the rabbit hole with this example I heard from Buffett: The ethical investor will probably not buy shares in a tobacco company, but will they avoid retailers who also profit from cigarette sales?

    He cited the example of Costco, who he likes as a company, but will undoubtedly sell products he disagrees with. I think damage limitation and balance, rather than perfection, is probably the answer on this one (like a lot of things in life…).

      1. I don’t be worried if someone DID agree with everything the US government does! Or any government…does Bhutan do happiness bonds??

  4. A timely post! This is exactly what I’ve been looking at with my girlfriend. We have been hoarding cash for a while and are just waking up to the idea of passive investing. However, we were unsure as to whether we were going to apply our ethical living standpoints to our portfolio. I think having read the above, its clear that we can do more good by spending our dollars on ethical products day to day and letting the market do what the market does. Thanks for your post!

  5. Well, a few notes I’d like to muse regarding SRI. Leaving aside the difficulty in defining what is ethical (this is different for each person), here are some general points:

    1) I don’t think the assertion that the stock market is not a place to lead a change in behaviour is accurate. With the rise of activist investors we see a lot of large-scale investors trying to influence the companies they are investing in. In the case of activist-investors such as hedge funds they simply try to squeeze more profit out, but in the case of some sovereign wealth funds such as Norways’ they are also actively investing in (or divesting away from) companies that are at odds with their national values. They actually have an advisory council on ethics and are not allowed to invest in companies that contribute to killing torture etc. So, they certainly are attempting to send some signals (very large $$$ amount signals) about what values they promote.
    Of course, this doesn’t work on the individual investor and their small-sum, but it does happen.

    2) In relation to market under-performance due to an active strategy: choosing to act in (self-defined) ethical ways almost always caries a cost that is willingly paid. Avoiding meat limits choice and sometimes is more expensive, fair-trade organic food is usually more expensive etc. The consumer chooses to spend more money on promoting a change she strongly believes in. Same is true for making a socially-responsible investment. The investor may willingly take a slight reduction in returns in order to support the companies she believes are doing good. That is a conscious choice, but not one which is less valid in the investment sphere compared to the consumer sphere.

    3) Another point related to active vs. passive: It might require a truly active strategy to find the ethical companies to invest in, but one can easily implement a passive strategy of *divesting away* from unethical industries. It may take more work, but if someone wants to divest away from oil companies or weapon companies one can construct a combination of sector-specific ETFs that will exclude the offending sectors. It is more work than buying an all-market ETF, and maybe giving up some returns, but if this is a core value of someone’s life than it might be worth it for them.

    4) One can also allocate a portion of their portfolio to specifically supporting causes that are dear to them. For example, 90% of the portfolio can be traditional (regular bonds, all-market etfs etc) and 10% can be specifically invested in sectors (green tech for example) or even directly in companies that the investor wishes to support more.

    You state that “The stock market was designed to figure out how much a company’s worth and provide a place for people to buy and sell shares in said company. That’s it.”. I (mildly) disagree on that point too. The stock market can also be viewed as a place to allocate the world’s wealth into the important companies. We tend to equate that with allocating the resources to companies that generate the most financial returns, but it is a sad reality that we do it in that way. Again, looking at Norway’s sovereign wealth fund as an example, they look at the problem as “where should we distribute our resources in order to both do good and generate returns”. Resource allocation is extremely important for societal progress, and the stock marker is the largest pool that engages in resource allocation. Again, it is not practical from an individual investor point, but that doesn’t mean the discussion about it should be muted.

    The Canadian Couch Potato Podcast had an episode dedicated to SRIs:

    Again, great topic which is on many peoples mind. Thanks for bringing it up!

    1. I love your blog but this article was a disappointment. I am not disappointed because of your stance but because of the rational behind it: it’s so weak…

      1- of course the stock can impact a company, what do you think short sellers are doing?
      2- it’s true buying the company stuff will have the biggest and quickest impact on its performance. But that performance is going to manifest sooner and later in dividends/stock price, so the correlation between buying the company stuff and investing is so much more obvious than you are saying.
      3. Yes SRI comes at a cost. But the cost of non SRI is bigger for everyone: the planet, the people and eventually the economies. I have no research to prove it but this is I hope common sense.

      I hope I will find your updated views on the subject

    1. It was after Vicki’s talk and a bunch of us were huddled around one of the tables outside. It was a pretty interesting discussion, but I bet it would have been even MORE interesting if you or Bob were there 🙂

  6. Spot on! People have different sets of ethical codes. There are people out there who won’t touch a cigarette or alcohol company because they are “poison” but will invest in defense contractors because “They protect AMERICA!!!”. Personally, I am the opposite; I own cigarette and even marijuana stocks, but no defense companies because the latter kills people involuntarily while no one forced anyone to use the formers’ products. But to each his own. No one is objectively right or wrong.

    It’s also possible to still oppose certain company practices and still own them in your portfolio. Despite my constant criticisms of Wells Fargo, I still have their stock in my portfolio. The fact is, EVERY company has done something you disapprove of. If you want to invest 100% ethically, grab a shovel and start digging a hole in your backyard because that’s where you’re putting your cash. Plus, as a shareholder, you can always vote out the CEO. And there’s no Electoral College or systemized political corruption to make your vote not count.

    And you’re right that the stock market isn’t the place for political activism, in more ways than one. From a practical standpoint, refusing to invest in a company doesn’t deny them any money. When you buy stock, you are buying it from another investor who agreed to sell it at that same price. The process is handled behind the scenes by your investment broker (they are brokering the deal, hence the title of “stock broker”), but ultimately you are buying from another investor rather than the company itself. Refusing to invest does not deny them so much as a penny.

    Best to keep your moral code out of investing as much as reasonably possible (refusing to do business with the local puppy-maiming factory is completely understandable).

    ARB–Angry Retail Banker

  7. It’s an interesting debate and you’ve made some good points for sure. But I always cringe when I hear the kind of dismissive logic that basically says “look how hard it is to be ethical! Give up.”

    And in terms of performance, my SRI portfolio has done really well. I know this blog discourages speculative investing, but the transition to a more sustainable economy seems inevitable given our environmental challenges, which means SRI could be an excellent long term strategy.

    For more constructive info on SRI checkout (no affiliation)

  8. I love your blog and reading how outspoken you are…..but this post was disappointing and a cop out. I’d be interested to see you retackle this issue soon.

    I have invested in the Jantzi fund but looking at the individual list of stocks I realize they are not socially responsible at all.

  9. Interestingly enough, I was just reading a research paper that provided some evidence for the exact opposite of SRI. That is, “sin stocks”.

    In short, sin stocks tend to be unloved by investors and trade at lower multiples than “non-sin” stocks, thereby making the actual returns of the sin stocks higher than average.

    Sad and unjust, but it appears to be true.

  10. “I’d argue that the stock market is the wrong platform to try to make your voice heard. The stock market isn’t designed to be a popularity contest”. Um, what? That’s almost exactly what it is. I don’t know much about the stock market but I know the price of a stock directly reflects the popularity of that stock among investors. If a significant portion of investors lose interest in a particular stock the value of that stock plummets, and that negatively affects the company in various ways (e.g. ability to issue stock compensation, make acquisitions, avoid takeovers). There’s a reason companies want to keep investors happy.

    SRI is one of those things, like boycotting Walmart, that has no real impact unless a significant number of people get on board. But that doesn’t mean we shouldn’t do it. That’s what ethics is about – keeping a clean conscience regardless of what everyone else is doing.

    I love this blog but I found this article kinda offputting because it sounds a lot like a copout. If SRI doesn’t fit with your values and your investment strategy that’s fine! Don’t feel guilty about it. But actively discouraging people from trying to be more socially responsible is just, well, unethical, isn’t it?

  11. If some people refuse to buy unethical companies in their index, they lower the demand and eventually affect the price. What happen next: other people buy theses companies at a bargain and get better returns.

    I believe that if we want to fight bad corporate behaviour, we should demonstrate that these behaviour reduce returns and those corporation worth less… Class action cost a lot, environmental issue and reparation are expensive etc.
    Make them pay.

  12. I actually agree with you on SRI, yet my largest holding is an SRI fund. Why?

    1. It has beaten the S&P 500 over the latest 10, 15, & 20 year periods (although I concede it does underperform in stock market rallies, as has been the case for the last 5 years).

    2. It has had less volatility than the S&P 500. It held up great in 2008 and also during the tech bust of 2000-2002.

    3. I can get it my 401k plan at the Institutional share class expense ratio of .71% (including plan admin fees). Yes, I know, for index fund die hards, that’s way too much, but it’s well below what the typical actively managed stock fund charges.

    4. It might actually do some good–although I’m not holding my breath on that one.

  13. I love your blog but this article was a disappointment. I am not disappointed because of your stance but because of the rational behind it: it’s so weak…

    1- of course the stock can impact a company, what do you think short sellers are doing?
    2- it’s true buying the company stuff will have the biggest and quickest impact on its performance. But that performance is going to manifest sooner and later in dividends/stock price, so the correlation between buying the company stuff and investing is so much more obvious than you are saying.
    3. Yes SRI comes at a cost. But the cost of non SRI is bigger for everyone: the planet, the people and eventually the economies. I have no research to prove it but this is I hope common sense.

    I hope I will find your updated views on the subject

  14. The stock market is exactly the place where you can have your voice heard. Some issues are debatable as to how we can define ethical. However, suffering is suffering regardless of what some people might think, and I do not want to invest in companies that use suffering of people and animals to make a dollar or two. I wish I knew ethical ETFs but its difficult to figure that out on my own now, unless someone reading this is able to suggest me any, please do 🙂

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