Socially Responsible Investing and Why To Avoid It

Despite what you’ve been told, don’t listen to your conscience, at least not while investing! Citizens should invest away, paying no mind to their morals in an already amoral game called the market. Although it might soothe the conscience to invest in companies that have eco-friendly and humane practices, it will not satisfy the wallet. Socially responsible investing is neither the most economically practical investment nor the only means through which to create economic change. There are other avenues to transforming the world for the better: as a consumer and as a shareholder.  

It is not selfish to maximize ones utility by investing in the companies that generate the most returns, in fact, that makes sense. According to an article from the Wall Street Journal, “over the past five and 10 years, 65% of socially screened funds have trailed the average returns of their peers.”

An additional economic downside to socially responsible investment is that there’s a more expensive buy in than with non-socially responsible funds: “Thornburg Investment Management launched the Better World International Fund...But if you have less than $2.5 million to invest, the fund will charge you an upfront ‘load’ of up to 4.5 percent and an annual expense ratio of 1.83 percent.” The more an investor has to pay up front or with yearly fees, the less that investor receives in returns. Socially responsible funds can justify driving up their expense ratios because of the additional effort involved with careful evaluation of a company’s socially responsible qualities. By contrast, avoiding “sin stocks” isn’t a factor with non-socially responsible funds, so the screening expense doesn’t exist.

Another issue is that when an investor buys into a socially responsible fund, that investor parts with their personal definition of socially responsible investing and instead subscribes to the definition set forth by the fund. This presents itself as a risk to investors trying to make a positive change because socially responsible funds sometimes include companies that may in fact have bad track records in terms of social responsibility. For example, the socially responsible index fund called CSXAX invests in Union Pacific (railroad) and ConocoPhillips (crude oil), both of which negatively affect the environment through pollution. A quick fun fact: in 2016, CSXAX actually underperformed the S&P 500, a non-socially responsible fund.

Considering all the downsides of socially responsible investing, the lower returns, higher fees, and sometimes not so socially responsible socially responsible funds, people should instead utilize alternative strategies to address corporate irresponsibility. A citizen can be a proponent of positive change by taking advantage of their roles as a consumer and shareholder.

I believe that society underestimates the power of the consumer. In reality, the people with the buying potential are major players in the market. With Halloween later this month, here’s a fun hypothetical involving The Hershey Company. If suddenly, across the world, consumers stopped purchasing Hershey products, perhaps because of opposition to its alleged child labor practices, this would significantly hurt its financial situation.

If consumers band together and start a movement to challenge the immoral practices of a company, this could make other customers question their loyalty to the brand under fire and perhaps switch their allegiance to more socially responsible companies. Illuminating a company’s unethical practices, and thus damaging that company’s reputation, may be more important than whether or not a movement actually hurts the profits of the company in question. Realistically, the goal of these movements is to increase awareness and start conversations about sustainability and humane labor practices.

With new information about the reality of company practices, investors in such non-socially responsible companies can work to correct the wrongdoings they see from within a business by making use of shareholder resolutions. These resolutions allow investors to file a proposal about something they would like to see improved in the company. However, there are some restrictions as to who can send in such suggestions. A shareholder needs to demonstrate their commitment to the business and can therefore only “file a proposal at a company if they own at least $2,000 or 1 percent of the company’s shares and have held the shares continuously for the year prior to the company’s annual submission deadline.” Despite these constraints, a determined shareholder can voice their opinions and attempt to make a company more socially responsible.

In conclusion, if given the choice to invest in a socially responsible business, avoid it. Instead, you can invest in non-socially responsible businesses while still creating change as a consumer and shareholder. You’ll make more money and your conscience can remain at ease.