Want to use your money to change the world? The pros and cons of investing for social good
Wall Street has a longstanding reputation for checking its conscience at the door. "Greed is healthy," stock trader Ivan Boesky told a University of California at Berkeley business school class in 1986. The inspiration for Gordon Gekko in Oliver Stone's Wall Street, he would later go to prison for insider trading.
Indeed, a persistent idea in finance — and the business world in general — has been that the only bottom line is, well, the bottom line: "The social responsibility of business is to increase its profits," economist Milton Friedman wrote in a 1970 piece in the New York Times Magazine.
Of course, this way of thinking has started to fall out of favor. The financial crisis cost nearly 9 million American jobs, and cast doubt on the belief that unrestrained capitalism can generate prosperity without consequences. A narrow majority of millennials actually say in polls that they oppose capitalism, and a third say they actively support socialism.
In this climate, "consumers are in a mood to notice" a brand's values, Tensie Whelan, director of the Stern Center for Sustainable Business at NYU Stern School of Business, told Mic. "It's that overall impression... The majority of consumers couldn't care less if 80% of brands disappeared tomorrow."
And — just as brands are leaping to satisfy consumers who increasingly expect more than empty slogans — financial firms are heeding the call for meaning, with a growing number of products that purport to further social good.
Care about environmental sustainability? Or supporting the advancement of female executives? Under the umbrella term of "socially responsible investing," there are now funds and other products that claim to let you eat your clean-conscience cake — and get big fat investment returns, too.
Funds that practice SRI try make money while investing your dollars "ethically," whatever that may mean to you. Over the last decade, the number of such funds have exploded, and people of all political persuasions have options today — including funds investing in companies that align with biblical values.
But is this actually an effective way to grow your money? Or even, really, a smart way to push for change? Here's what you need to know.
The case for socially responsible investing
Many proponents of SRI will tell you their main goal is not actually social responsibility: For them, identifying companies that are more thoughtful about sustainability — or that have diverse boards — is really about seeking out businesses that are better managed.
Andrei Cherny, a former speech writer for presidents Bill Clinton and Barack Obama, makes that case. He left politics and in 2014 launched Aspiration, a company focused on "banking and investing that puts you and your conscience first," as he describes it.
In addition to a no-fee bank account, Aspiration offers a socially responsible mutual fund that avoids certain companies — like those that sell firearms or fossil fuels. Cherny points to the fund's outperformance relative to fossil-fuel investing peers as evidence that SRI can be a financial and ethical win-win.
"I actually don't care whether the management of the company cares about the environment or not," Cherny said. "What I do care is that they understand that if they're switching from lightbulbs to LEDs, they're [incurring] a short-term cost for long-term savings."
"I don't care whether... they care about diversity or not," Cherny went on, "but I want managers who know that if they do care... they're going to have a more innovative workforce that's going to do better over time."
This type of rhetoric — that social responsibility is a litmus test for smart management — is common in socially responsible investing.
Even "Inspire Investing," which aligns its portfolio with biblical values — avoiding businesses that make abortion drugs, for example — uses analogous logic. Though it caters more to red-state investors, Inspire has a similar slogan to Aspiration: "Good values and good returns are not mutually exclusive."
Like Cherny, Robert Netzly, founder and CEO of Inspire Investing, told Mic he's not leaving money on the table: "Companies that are operating with high levels of integrity and trying to be a blessing... that's just good leadership and companies with good leadership tend to outperform."
He went on: "As a whole, the impact investing movement has a liberal tilt... Most of those portfolios are managed according to liberal values which is fine, but people with biblical values have been left out."
The idea that investors should be able to put their money where their mouth (or values) are certainly makes sense. But there's just one catch: Socially responsible funds as a whole don't actually outperform.
It seems that the main case for SRI — that you can promote social good and make more money — is weaker than proponents might like.
The case against impact investing
Between its launch in 1990 and 2014, the MSCI KLD 400 Social Index of 400 socially responsible companies beat the broad market — the S&P 500 — by about a half of percent, according to Morningstar.
"It tends to be a wash," David Kathman, a senior analyst at Morningstar, told Mic. "Some are going to be good funds and some are going to be bad funds."
In other words, you might get lucky and choose a market-beating bundle of stocks. Or you might buy a clunker. Aneel Karnani, a professor at the University of Michigan's Ross School of Business has long written that at best, corporate social responsibility isn't what it's cracked up to be.
"CSR is either irrelevant or ineffective, either way it's useless," Karnani told Mic. "There are two opposite sort of views here: One is the free-market view that companies should maximize the profits. The other is that they should pay attention to these values and also try and make a profit. But how can you do all these things and maximize them? ... You cannot have two bottom lines."
In other words, companies are never going to be good moral arbiters, Karmani argues, and that's a responsibility best left to voters and elected government.
Karnani pointed to coal-burning and issuing payday loans (short-term loans with high interest rates popular among desperate borrowers) as examples of corporate behavior that many people agree is bad for society — but is immensely profitable.
"I think even those companies know that what they're doing is immoral but they want to do it and it's legal," Karnani said. "We have two choices: We can ask companies to stop doing this or we can pass a law. I don't see the point of preaching to someone."
Karnani also rejects the argument that socially responsible investing leads to higher returns: "How can you reduce the set from which you can pick your investments and boost your returns?" Karnani asked, alluding to modern portfolio theory. Fewer choices means you are limiting your access to profits.
Now, SRI defenders would argue that that's a bit of a mischaracterization. And, in part to address that very criticism, Morningstar's Kathman said, SRI funds have begun to move away from negative screens (that cut away companies) to positive ones: that is, trying to find companies that are exceptional at being "good" as opposed to avoiding companies that do "bad." Whether that will improve returns has yet to be seen.
Impact investing is best if you care more about impact than getting rich
All this said, if you set the desire to get rich aside, there's little doubt that impact investing can be incredibly effective — especially if you're not alone.
Organizations like animal rights group PETA have been buying stock in companies like Tesla and SeaWorld as a means of activism since the 1980s, including, most recently, Canada Goose.
"We own stock in dozens of food, fashion, biotech, and other companies," PETA associate director Ashley Byrne told Mic. "It gives us more access and it allows us to present the facts to a company's shareholders if we do end up filing a resolution."
PETA claims this tactic can be effective: Byrne pointed to Tesla's recent adoption of offering vegan (as opposed to leather) interior cars, or SeaWorld's decision to retire performing orcas as examples of how activism can influence corporate behavior.
There's a few reasons why PETA's method might work. While there are a lot of caveats, special cases and loopholes, most of the time when you buy shares of common stock you get access to a lot of important rights, including the right to introduce "shareholder resolutions."
Regardless of whether these resolutions get adopted or not, one study from researchers at Harvard Business School found that management often responds to them anyway.
"The bulk of the leadership comes from the company, not the consumer," NYU Stern's Whelan said. "Consumers can't go out there and make products appear that don't exist." That's one reason angry shareholders can wield more power than consumers, even those leading a boycott.
Of course, not everyone has the income to force companies to listen to them by becoming a shareholder — and buying stock in controversial companies can also hurt your bottom line: SeaWorld's share price, for example, has taken hard hits.
So if you're looking to promote social good through investing, a lower-risk choice is still going to be a mutual fund or ETF: Here are some top-rated options, according to US News & World Report. As long as you aren't expecting to get rich, you can rest easy knowing your money isn't furthering climate change or discrimination — or sin, if that's your issue.
And maybe you'll even get lucky and choose a winner, too.
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