Do You Invest Ethically?
What is Ethical Investing?
“Ethical Investing” or “Socially Responsible Investing” is a form of investing where you don’t invest in companies that you find to be against your own personal morals. Classic “sin stocks” are tobacco, alcohol, casinos, military, and sometimes big oil and other polluters.
There has been a lot of debate about ethical investing over the years. Some people are inclined to invest only in companies that they like, while others invest in whatever companies they think will provide them with great returns regardless of what that company actually does. There are arguments for both sides, and I won’t get into them. I’m simply going to offer my view and in return ask readers for their view.
My reasons
I like an uncluttered mind. I believe in aligning all activities and thoughts as much as possible, and so I personally will not invest in a company whose fundamental product or service is something that I truly disagree with. Unfortunately, just about every large corporation does things I am not fond of, and there’s really no escaping that, but I’m willing to invest in a company as long as the heart of what they do does not completely conflict with my values (especially since shareholders have the power to align the company with their values). The reason is that I don’t want to have the mental inconsistency of cheering for a company to grow (so that my wealth grows) while simultaneously hoping that fewer people use their product (for ethical reasons/a better world). What does this mean? Well, it can be gray for sure, but I do have a list.
My ethical investing list
I don’t invest in:
-tobacco companies
-slaughter houses/ meat companies
-companies largely owned by countries that don’t support adequate human rights
I don’t necessarily mind investing in:
-alcohol producers
-tasty but unhealthy food companies
-companies that sell meat as a part of their business but not as a centerpiece
-oil companies
-defense companies (although by an agreement, I cannot invest in most aerospace companies)
-companies known for unethical practices but for which the fundamental product or service is not against my principles (ie Walmart)
-Health care companies that face a wide range of litigation
-anything else (a given company with no notable ethical issues)
As admitted, it’s pretty gray, and I’m not going to defend against claims that there is certainly some inconsistency in there, despite my love for consistency. If I could find a company that does no wrong, well, I’ll look for some flying pigs. My overall guideline is basically that I have to be able to sleep at night with my investments.
I also promote shareholder advocacy. For companies that have a core product or service that aligns with your principles, but whose changeable business practices do not, shareholders have the power to change the values and the culture of their company, but only if enough of them decide to do so. This is also a reason why I promote individual stock ownership: I favor voting wealth to be in the hands of individuals rather than financial institutions.
This can be a pretty intense issue for some people. I would love to hear people’s thoughts in the comment section. What won’t you invest in? What’s the most evil company out there? Inversely, what’s the most ethical company out there? Will you invest in a company that does not align with your set of values?
{ 10 comments… read them below or add one }
We struggle with this topic quite a bit. I prefer balance albeit lopsided. I feel that to properly diversify our portfolio we have to look at some companies/sectors which are not socially responsible (e.g. oil) and try to invest in the few we deem to be the most responsible. To balance such choices we load up on companies we feel are indeed socially responsible. Our belief is that our investing, and personal finance decisions/choices, must be sustainable. How sustainable is defined, especially in the PF context, is sticky. But to ignore a properly balanced portfolio while singing GREEN GREEN GREEN until we are green in the face is not a sustainable choice for our finances. So we pick the “best of the bad” (which is what all SR Indices do) and load up disproportionately on the “ethical” sectors/businesses.
Very interesting question! As you say, no company is pure. They all have their share of evil doings.
I simply go by what I personally feel I can live with. Tobacco is fine by me, but I don’t like Dow Chemicals!
I don’t invest in Monsanto or Haliburton. Defense, I’m on the fence. I don’t feel too strongly for or against them.
But I do realize with MFs or ETFs some of these will be in it. I can do nothing about that.
But I won’t preach to others if they do invest in these companies. Each of us have a value system and you should go by that.
I invest in anything that has potential to make me money and pays a divided, “sin stocks” included.
Great article. I just started my blog tonight (http://mysustainablereality.blogspot.com/– sorry for the plug), but this is something I definitely plan to write about in the future.
For me, it’s similar to DividendMonk. No tobacco. Never thought about slaughterhouses as an investment, but since I increasingly try to buy organic meats, if I ever found myself considering such a company I would probably rule it out. Pure defence stocks are out for me (if you’re wondering why, check out the documentary “Why we Fight”). I think that’s it for whole industries that are ruled out.
Specific companies… hmmmm…. there are a lot that I struggle with.
Wal-Mart — I have nothing against retail, of course, but their whole competitive advantage is based on business practices that, while legal, I think are harmfull to society.
Montsanto — ditto.
Coke and Pepsi — I’m really on the fence, and so far have had better options to invest. I don’t imagine I would not invest if I thought it were the right pick, but I would only do so begrudgingly… a lot of their recent (last 10-15 year) growth has been related to bottled water, which I see as one of the most harmful (and ridiculous) industries around. I also have some issues with the way they market their products in the developing world (I’ve been to Africa several times, and it kills me when I see people who can’t afford potable water drinking soft drinks).
I guess with Coke and Pepsi, I would see it as investing in strong adaptable businesses… which means if the business opportunities that they profit from that are harmful become less profitable, or better yet illegal/regulated, they’ll adapt and continue to find ways to grow… and generate income for me. So as weird as it sounds, I would consider investing, but as a consumer and advocate for certain issues, I’d continue to fight them every step of the way…
Great comments, all.
I don’t have an issue with small defense companies. One of my holdings, NPK, manufacturers small arms (in addition to non-defense items). In theory, I don’t have an issue with larger defense companies either, but in practice, I do. So I avoid them (and legally must avoid them anyway due to a conflict of interest.)
Very interesting post. I invest in companies that I like(impressive balance sheets), I don’t let ethics get involved with money. Money is a very unethical topic, so I don’t bother investing in ethical companies.
Matt — NPK is a company I’ve looked at, and because only about a third of their business is defense, I’d be OK with that.
Noticed this article today, thought it was relevant: http://www.cbc.ca/canada/newfoundland-labrador/story/2011/02/08/nl-tobacco-suit-208.html?ref=rss
It raises another reason not to invest in Tobacco — I think the valuations are low and the yield is high because there’s a significant amount of risk as governments will increasingly try to recoup healthcare costs through civil action…
Jeff,
Can you clarify what you mean when you say that money is a very unethical topic?
Jay,
While I agree that tobacco stocks do carry some risk in varying degrees, that’s historically not been a good reason to avoid them. For instance, Altria was one of the absolute best long-term stocks to invest in over the last several decades. It has consistently remained fairly or undervalued, so the large dividends allowed investors to continually reinvest and achieve huge compounded long-term returns. There has always been threats of litigation, regulation, etc. And if you go with international tobacco companies, the risk is lower because they spread their regulation risks out.
One thing, though, is that almost every large tobacco company has a fairly bad balance sheet. That doesn’t help the valuations either.
Matt,
I just think that its hard to make a considerable amount of money “ethically.” Those who are at the top of their game in their specific niche, most usually did something unethical to earn their status/wealth. Be it steroids in baseball, firing many employees, or insider trading. I wonder if Buffett has done anything unethical.
Loved this post. We think about investing ethically a lot. But I tend to agree with your points that no companies are completely “pure” and shareholder accountability is key if we desire our world to move towards a more sustainable, ethical way of doing business. One step forward would be to demand companies for transparency beyond financial statements – their suppliers, rigid standards applied to respecting human rights, the more transparent companies are, the more we can use what power we have as investors.