Investment Workshop 23: Socially Responsible Investing

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 J.L “The Godfather” Collins in his 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, people debating about it when hurricanes hit the States and cause people to question whether we should be investing in companies that contribute to climate change. Or when school shootings cause 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, 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.

Onto the next section!

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Disclaimer: The views expressed is provided as a general source of information only and should not be considered to be personal investment advice or solicitation to buy or sell securities. Investors considering any investment should consult with their investment advisor to ensure that it is suitable for the investor’s circumstances and risk tolerance before making any investment decisions. The information contained in this blog was obtained from sources believe to be reliable, however, we cannot represent that it is accurate or complete.

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