First, let me say that I am happy to see that the most common and erroneous argument against SRI wasn’t included in this post: that SRI necessarily means losing out on a degree of return. Depending on the type of SRI one partakes in, it can mean sacrificing a return, but it is not necessarily so.

People who engage in community investment and micro-loans are often willing to lose out on a small portion of their return. At least in Canada those who incorporate community investment into their portfolios gain increased tax advantages. But accepting below market returns is not a necessity.

There is growing research and a slowly increasing consensus amongst financial researchers that incorporating environmental, social and governance (ESG) issues into a portfolio is a necessary step because of the effectiveness of positive ESG practices to mitigate and reduce risk.

Also, I want to come to McGugan’s erroneous and misleading analogy. Whenever a client sits down with a financial advisor, the advisor is required to fill out a Know Your Client (KYC) form. Currently, the industry only requires the KYC form to contain financial information. However, a student conducted by MacKenzie Financial, a massive mutual fund company, showed that close to three-quarters of investors wanted their advisors to ask them about their values. To argue that someone should not incorporate their ethics and values into their investment portfolio when they incorporate those same beliefs into their other daily decisions creates an existential gap. It is also another manifestation of market fundamentalism: whatever the market decides is what is ethical.

Finally, I understand that many SRI funds and ETFs incorporate less than ethical companies into their portfolios. The difference between SRI funds and traditional mutual funds is that SRI fund companies take a progressive and proactive role when it comes to their voting records. They believe that shareholder activism is a positive way to engage with companies and that it will be easier to change behavior from the inside rather than completely boycotting a particular company.

SRI is about matching beliefs with portfolios, creating progressive change in corporate governance, mitigating risk over the long-run and still earning returns that will allow someone to retire. The only way to argue against incorporating someone’s ethical beliefs into their portfolio decisions is through a misleading and false analogy.

I am happy to see increased attention and debate on this topic amongst personal finance bloggers.

Regards,

Stephen

yet… the way we express ourselves through the stock holdings carries more weight in the real world than ANY other action that we might do as environmentalists. Recycling, reusing, reducing as individuals is small potatoes compared to whether to put 10k this year into uranium or oil, versus shares of Alterna Energy, Shear Wind stock etc.

sigh.. lots of difficult decisions to make.

The top 10 stocks from TDB902 (tracks S&P500) are all in KLD.

I was interested, but this ethical index doesn’t seem all that different from the S&P500.

I think the biggest problem with SRI is the lack of offerings. Although it’s true that you could never get a portfolio which matched your beliefs exactly, there are only so many belief systems, and most people fit relatively well with one or another. However, because so few investors are interested in making SR investments (or know the option exists), there isn’t the market for creating new funds. Funds therefore tend to be just called “ethical”, without a lot of nuance about what that means.

I think if everyone insisted on buying stocks which reflected their values (and really, everyone has some kind of values), there would be a market for the funds, and people would probably end up paying not much more than they currently pay for non-ethical funds. But that will never happen.

A note of the Jantzi social index- one thing which readers may have a problem with is that (I think) it uses a “best-in-sector” approach, which means that every sector will be represented, just by their “least unethical” corporations. This might be why Suncor is included- maybe, taking both the environment and other factors into consideration, it was the best of a bad lot.

Brad- I think that when buying shares in companies you support increases the share price, which will help the company raise money through issuing new stock at a later time. Plus, since a common interpretation of the responsibility of the board of directors is to maximize shareholder value, the board may have a duty to increase share price whether the company benefits directly from that increase (this is partly why companies keep paying dividends year after year)

And when you invest in a socially responsible fund, the votes which come from the shares you buy DO get used to promote “ethical” practice, so the Abby Rockefeller strategy isn’t beyond us small-time investors. This is one advantage to owning an ethical fund over particular ethical stocks. Unless you’ve got a lot of time on your hands, you’re unlikely to use your votes at all, let alone have the resources to research the various ethical issues involved in a decision.

Most of the time, when you buy shares that are already out there in the market, you’re buying them from other investors. As such, you’re not really helping the “bad” companies whose stock you’ve just bought. You haven’t actually helped them raise any new money to do more bad things that you don’t want to support.

If that’s true, then in terms of couch-potato strategies I wonder to what extent index funds buy new offerings as opposed to buying shares that are already out in the market? I don’t know how that works, but if most of my index funds consist of shares bought from other investors then my dollars are probably not being used to directly support cigarette manufacturers or other companies I’d rather not support. Does that make sense?

In any case, there are really two main approaches to SRI: one is “avoidance” (i.e., you don’t want to buy shares of “bad” companies), and the other is “encouragement” (i.e., you buy shares of companies that do good stuff that you want to encourage). I’m not sure how effectively you can pursue either strategy through a couch-potato portfolio.

For my part, I’m focusing my SRI investments on the low-risk portion of my portfolio. Desjardins’ Caisse Solidaire offers a number of GICs and other secure investments whose funds are used directly to support socially and environmentally responsible projects/enterprises in Quebec and elsewhere.

If I were rich enough, though, I think I’d pursue the Abby Rockefeller strategy and buy up tons of shares in companies that are doing things I disagree with, and then use my influence as a major shareholder to get them to change their ways. That’s probably the most powerful strategy of all, but unfortunately out of reach to all but a few of us.