From time to time, I hear about people who are concerned about ethical investing. Ethical investing does not refer to avoiding the Goldman Sacs style of investing where you sell a product to one group of people while simultaneously placing bets against the product. That would definitely not be ethical, although it is a shrewd business model. Rather, ethical investing is all about making sure that your investments are properly aligned with your moral and ethical principles. However, this is not without problems.
These days it’s in vogue to hate corporations. People on the left of the political spectrum hate corporations for all kinds of reasons: Pollution, global warming, working conditions, wages, health insurance, obesity, health problems, high prices, non-organic food, general corruption…. This list is never ending and I see no benefit in itemizing it any further. Not to be outdone by the donkeys, the political right is starting to get in on some of the hating action too. There’s just so much to hate.
A very logical outgrowth of all this moral high mindedness is that if you have some profound moral aversion to something, you shouldn’t invest in it. Maybe you don’t like tobacco, so you don’t buy Altria (MO). Or you’re a pacifist so you don’t buy General Dynamics (GD). That’s all good and fine. Passing up one good investment, when there are so many potentially good companies out there isn’t that big of a deal.
Problems arise when you get your moral panties in a wad over everything under the sun. I have a few friends who fall into this category. Target lets its pharmacists conscientiously object to birth control. Coca-Cola and McDonald’s are making you fat. Oil companies are wrecking the planet. Foxxcon (Apple’s supplier) doesn’t treat it’s employees well enough. Wal-Mart doesn’t offer health insurance to its employees. And let’s not stop being opposed to cigarettes and the defense industry. My fingers are getting tired of typing this list.
I’m not going to debate for or against any of the above points as no one’s mind is going to change, but everyone’s blood pressure will surely rise. But hopefully you can see the problem. Eventually, you have so many issues with companies and industries that you can’t invest in anything. You’re paralyzed. If you’re not willing to invest in anything, you’re going to have problems achieving financial independence no matter your time frame. Bank CDs earning 2% just aren’t going to cut it. And this assumes that you don’t have a problem with banks or earning interest.
Reality is harsh
Nothing is perfect, and corporations are no exception. These are multi-billion dollar companies, with a worldwide presence, and a very diverse array of stakeholders. Corporations are fighting for their metaphorical lives against their business rivals. Sometimes they battle it out in countries where honest deal making doesn’t work (India and almost all of Africa basically run on graft). Sometimes they fight against competitors that undercut prices, steal intellectual property, and are backed by the full economic power of the state (I’m looking at you, China). Dig around enough in any corporation’s activities and you’ll find problems. That’s just how things are. If you’re going to be an investor, you’re just going to have to deal with that.
Companies do make (often halfhearted) efforts
Companies are sensitive to the growing desire for increasingly ethical practices. I credit all the various things that we’re now supposed to be “aware” of. As such, you can find all kinds of corporate initiatives to reduce corruption, or lower carbon footprints, or meet any number of other social or environmental initiatives. I’m not going to bullshit you and say that these amount to much at present. They don’t. And if the public loses interest, they’ll be sidelined. But if public pressure remains, it’s likely that these efforts will slowly mature and become more integrated within corporate culture. Or maybe I’m just an indefatigable optimist?
Overall, I think that the long-term trend is positive.
Good companies will adapt
Many companies that are discussed in the world of dividend growth investing have histories spanning decades, occasionally even more than a century. Consider what that means. That means that these companies have adapted to all kinds of new regulations and social changes. Two World Wars, the Great Depression, the 60s, women’s liberation, the fall of the Jim Crow South, the Cold War, the internet, the environmental movement, and now the Great Recession. Society will keep on changing and solid companies will learn to play within the new rules (or subtly bend them) and make a profit. Crappy companies will go out of business.
So what should you do?
This is just my opinion. You’re the one who has to sleep at night with your investment choices, not me.
Focus on choosing good investments. That is a hard enough goal to accomplish before you start piling an overdeveloped sense of moral outrage on top of it. If there are issues that are really important to you, support groups that advance those issues. If it helps you sleep better at night, pick your most hated industry or company and just don’t buy their stock.
If you are really adventurous, you could try getting involved with hard money lending to local businesses that have a strong mission statement built around some social or environmental justice issue.
As a general rule, let the social, environmental, and moral crusaders do their crusading. They’re good at it. I’m going to stick to investing, only because I’m much better at investing than crusading. As I said before, the good companies will adapt and the long-term trends are likely to be positive. So I’m not going to worry.
But please, don’t think for a moment that your decision to not purchase a couple hundred (or less) shares of major S&P500 company actually matters. You’re less than a rounding error when compared to what institutions (e.g. Vanguard, Fidelity, other massive index fund providers) buy and sell each day.
Disclosure: Long MO KO, and GD.
Readers: Do you practice ethical investing? If so, how many limits do you have? Do you think ethical investing is able to produce reasonable returns?