The Pitfalls of Ethical Investing

771168_peace_sign_painted_on_rock_1From 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?

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  1. Such a true statement. If you have a major issue then by all means don’t invest in that industry or company. But when it comes down to it you’ll probably have an issue with just about every company out there if you look around long enough. As you mentioned some countries you won’t even stand a chance in if you’re not greasing the palms of someone. It’s a shame that’s how it is but it’s a reality of trying to operate in the emerging markets.

  2. I don’t invest in tobacco companies, but it has nothing to do with ethics. I just don’t feel comfortable with the industry and where it is going in the future. I am just sick of people who get mad that a company would *shock* want to make a profit. What do they think they are in business for?

    • If you don’t invest in tobacco companies because you think that business wise, they’re a bad buy – then that’s okay.

      I have a friend who seems to have mental problems with the profit thing. He doesn’t seem to understand that if my industry doesn’t make a profit, I don’t have a job. And neither does anyone else in my company. Oh, and lots of important discoveries and inventions that improve people’s lives never make it to market either.

      But it’s easier to complain about evil corporations than it is to fix your own life/financial situation.

  3. Great post! It really is the sum of the limitations where things get costly. And of course it is incredibly short-sided to think that any large corporation will have kept their nose clean in every conceivable situation. As you said, certain countries, and by extension their cultures, are very much “squeaky wheels” just begging to be greased!

    • My company has some dealings in India. And it is amazing just how little gets done without greasing some wheels. Really, nothing moves without money. All your regulatory applications will just sit there until someone gets paid. It’s pathetic, and hopefully over time, India will become less corrupt, but that’s the way it is.

  4. Journey,

    Couldn’t agree more. This has been my longstanding response to anyone who has come onto my blog and questioned my investments in defense companies or tobacco companies or (insert name here) companies.

    You can find something unethical with every company if you look deep enough. Anyone who believe different is naive, in my opinion. It’s all a matter of what you find ethical, and this subject is extremely subjective really.

    Great post!

    Best wishes.

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  6. Some of the companies in my portfolio are in sectors that many would find objectionable: tobacco, firearms, and booze. But everyone has their own bete noir. Me, I don’t much like giant agribusinesses like Monsanto and ADM. Neutral on pharma and defense. Horses for courses.

  7. I’ve invested in pharma, tobacco and oil (and I continue to hold oil investments). I have an investment in a funeral home operator in Australia. Its a nice steady business that tends to increase with death rates. I had someone ask me once if I felt comfortable making profits from death. I view it as providing a needed service. Needless to say, the position has more than doubled since I bought it so i remain glad I wasn’t convinced into selling :). If you really feel the need to help, you can always use some of your money in charitable endeavors, but one should never confuse investing with charity.

  8. I have no qualms investing in anything that turns a reliable profit. Business is business, and if a company thinks they can make money in certain ways compared to others, I’m okay – I just want to be a shareholder, nothing more.

  9. I don’t really invest in single name stocks anymore, but even if I did I wouldn’t be concerned with this. I’d focus on their financials and whether or not they were doing anything shady with their books.

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  11. Just came by after seeing your post on Brick By Brick. I think you’re right that if you focus on everything that’s negative that’s probably what you’ll find and it will make your task that much more difficult.

    Pretty much any company that is big enough to be on the S&P 500 is there because they are always pushing the extremes in some way. If you search there’s always some ethical gray area somewhere where they are pushing the boundary of what they are legally allowed to do in order to find a new market, make a cheaper product, etc.

    One option to consider would be trading an index like the S&P 500 or Russell 2000 instead. That way you at least have the huge diversity to kind of spread the negative and positive around. And as you say, the good guys usually keep going and stick around in the index over time.

    • Cody,

      Thanks for stopping by. I agree that you could dodge some of the problems by just buying an index.

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