Here’s part two of my conversation with Timothy Nash, president of Strategic Sustainable Investments and the blogger behind The Sustainable Economist. (Part one is available here.) Next week I’ll go into more detail about specific investment products that combine passive investing with SRI principles.

Many socially responsible investors seem to think buying a company’s stock is somehow giving them capital they can use to do evil, and that’s why they’re wary about owning index funds. I’m not sure I buy that argument.

TN: I often get asked how much of a difference I’m making by owning socially responsible index funds or ETFs. And it’s tricky, because obviously when you own equities the money doesn’t go directly to the company—at least not once you’re beyond the IPO. But you can make the argument about cost of capital. When companies have a large market cap, the more demand there is for that stock, and the easier it is for them to raise capital.

There is another argument, too. With ethical consumerism—whether you’re buying fair trade, or local, or organic—you are impacting that invisible hand of the marketplace. You’re creating demand for fair trade, or local, organic produce in the marketplace, and then you’re supporting those businesses. You can make the same argument when it comes to owning mutual funds or ETFs: by contributing, even in modest amounts, to the assets under management of these funds you are showing support for this type of investment strategy, and you are strengthening that fund.

One example might be the Meritas Jantzi Social Index Fund. Its MER is well over 2%, but Meritas has been at the forefront of shareholder engagement in Canada. Some people may be willing to pay that high fee to support their efforts. That’s different from paying for active management.

TN: Exactly. And that’s why I really like the shareholder engagement approach. Because then you are having an impact by pushing the company toward sustainability. I think we’re onto something there: it’s more about the investment philosophy you are supporting. In terms of where your management fees are going, would you prefer them to go to a manager who is socially responsible? I think that’s a valid argument, though whether it will have traction with investors is up for debate.

Meir Statman makes an interesting argument in his book, What Investors Really Want. People often say you should not spend more for socially responsible investments: instead, you should simply buy a low-cost index fund and use your savings to support your preferred charities. But Statman says for some people that’s like telling an Orthodox Jew he should save money by buying cheaper cuts of pork and donate the extra money to the synagogue.

TN: I think that’s definitely true. For most of my clients, it comes down to integrity. Many of my clients work in the non-profit sector, in social justice, or in the environment. And if you are working for an environmental organization day in and day out, and then your pension plan invests in oil sands companies, there is a gap there. Many of them do not want to put their money in any fund that holds companies they would not hold themselves. It really comes down to aligning your investments with your values.