'Ethical' funds?

May 20, 2007 4:49 PM

How ethical are Ethical Funds? After meeting with an SRI adviser and perusing the literature, I'm not so sure.

Recently I got interested in investing my money in something more profitable than a term deposit. I know nada about the stock market, but after reading up on Socially Responsible Investing, positive screening, etc, Ethical Funds seemed like a good fit. So I set up a meeting with an SRI specialist at my credit union to talk it over.

I'd thought SRI meant investing in only 'good' companies (told you I was new to this). Through the meeting I found out certain businesses I find rather reprehensible - and make a point of not frequenting - are on the list for most SRI funds. At least, that's how I understood it.

My adviser was pretty convincing - stakeholder activism, power to bring about change, and so on - but I'm still doubtful. Yeah, it's great that socially-minded stakeholders convinced Company X to finally produce a sustainability report - but if X still employs sweatshops, busts unions, and in general conducts itself in a way that I don't support, it seems like a moot point. I'm all for changing businesses from the inside, but it seems like any changes accomplished will be concessionary at best.

So I have a few questions. Feel free to answer any or all, in whichever way you see fit:

1) Do the benefits of ethical investing outweigh the negatives?
2) What have your experiences been with Ethical Funds, or related funds (Meritas, etc)?
3) Are there any other options? I know about local, microcredit initiatives, but I'm wondering if there are any super-ethical plans with very rigorous criteria (and whether they make any money at it).
4) How much knowledge/time would it take for me to be able to invest on my own, without a built-in plan? And would this be worthwhile, considering I'd be filtering out a lot of profitable companies? I should clarify that I mean "worthwhile" financially - I'm aware that supporting socially responsible companies is rewarding in non-monetary ways.

posted by lindsey.nicole to work & money (19 comments total)

Invest in ethical funds for ethical reasons, nothing more. Nevertheless, I happen to think that if a company values their customers, their employees, their communities and lastly their stockholders, that in the end they will prosper more than an average company. Do the right thing, yet be aggressive.
posted by caddis at 5:29 PM on May 20, 2007

I can only approach 1 & 2.

1) The 'negatives' seem to be two things: lower performance and ethical certification. The performance hit is just like any other common consumer situation. You'll take a hit in convenience, price, name recognition, etc. for the sake of having made an ethical decision. The ethical certification is based on reputation and transparency. Large firms with solid reputations are going to be no different with their ethical funds. Reputation makes them money so they have no reason to be underhanded.

2) I have a 401k through my employer with Merill Lynch's Calvert Socially Conscious Fund. For me, I had to limit myself to those available to receive matching contributions. I'm glad that the Calvert fund was available (the only ethical fund), and I hope that my participation creates a market for more funds like it. It's portfolio is selected by a non-profit organization pioneering the market for like investments. So while I don't have airtight ethical assurances on each company beyond what the fund literature says, I do know that my money isn't going to Lockheed to make missiles or whatever. Popular performers that aren't on a fund's list tell as much about the fund than what is on there.
posted by cowbellemoo at 5:36 PM on May 20, 2007

I don't know terribly much about investing, but I do know a little bit about SRI. I have had money in Domini (one of those shareholder activist funds) for about ten years and Parnassus before that. I also have money in Fidelity and because of that I was able to save up some cash to buy my house in the late 90s.

My take, speaking only for me and my view of the world, is that investing in stocks and mutual funds to make money is at some level not totally ethical anyhow, so you have to really draw your artificial line someplace you feel good about. I like Domini, they don't lose money, I like their shareholder activism stuff because I think it matters. I also think the fund does better because they are invested in companies like Nike. I also think that Nike both is and is not socially responsible at the same time (they're the #1 retail user of organic cotton in the world, or were recently iirc) and so putting them on a GOOD or a BAD list is going to be a dramatic oversimplification.

Your SRI funds would like to to think it's that simple and to invest in them, and your wanna-make-money folks will tell you that you can never make money with SRI. A while back we went through some SRI debates at the American Library Association (article well worth reading, talks a bit about profitablity of SRIs). There was a resolution suggested that said that ALA had to consider SRI options with their investments. At the same time, few if any SRI funds perform like the big "bad" funds. If you're a person making a choice for you that's one thing, trying to create larger scale changes this route is a totally other thing.

That said, I'm considering pulling my Money out of Domini and going to Fidelity. I don't have enough money to make a huge difference and I find Domini annoying to talk to on the phone. You talk to nice people who seem really happy to work there, but they're crap for financial advice and I nearly pulled my hair out trying to get some options for how to roll over my IRA with them.

My personal take is that if I get more money and use it to do awesome things with (I have a good track record with philanthropy and being fiscally responsible, so this isn't just my half-assed rationalization, at least not in that way) that's a different sort of social good. I could also live in a box by the river and eat only ferns and drink dew and reduce my carbon footprint to negative numbers purely through breathing and that's another way to look at how to be a good person. I don't mean to make light of your serious question, just to indicate that a lot of these thins are relative when looked at in the bigger areana. I care about social investing, but I think it's a difficult path.

It's not at all hard to decide you want to just invest in a few companies that you like. You might even want to look and see if there's an invesment club or other group of like minded people in your area to talk to about things like that. Some of these decisions have to do with what you want your money to DO for you [short term gain, long term gain, low risk long term gain, etc] and how you can fit with you know about SRI into that.
posted by jessamyn at 5:48 PM on May 20, 2007 [3 favorites]

well, maybe I can stab at #4...

4) I don't research and invest in individual stocks because I'm lazy and unlucky. That said, if I were to go about doing so with an ethical bent I think that my ethical criteria would actually help narrow the field in a good way (since it's so much information to process). I'd screen for profitability as any other newbie trader would, taking analyists' words as gospel, and develop a small portfolio diversified with lots of money in boring things like bonds. It would be a fun hobby, I think, rooting for your little stable of companies you believe in. Reactionary buying/selling based on news about the companies might actually be felt and 'train' companies to fly right.
posted by cowbellemoo at 5:55 PM on May 20, 2007

Thanks for the answers so far, all. I should clarify that opting out entirely is an option I'm willing to consider. So it's not just "I want to invest - but ethically" - I would be willing to just sit on my cash, if it was argued convincingly.
posted by lindsey.nicole at 6:03 PM on May 20, 2007

investing in stocks and mutual funds to make money is at some level not totally ethical anyhow

Bears repeating. We're already assuming that capitalism should be indulged to have this conversation. I guess an alternative investment would be livestock in this case. (speaking of...enjoy your moo-sandwich, jess!)
posted by cowbellemoo at 6:06 PM on May 20, 2007

Fair point, cowbelle. Since I live pretty willingly in a capitalist society, have a paying job, etc, I'm working under the assumption that making money can be ethical. Whether it's not is probably worth a new AskMetafilter question.

(Also, I grew up on a farm, and can attest that the livestock industry is as capitalist as the rest of them. Except maybe in Cuba...)
posted by lindsey.nicole at 6:49 PM on May 20, 2007

I work as a shareholder advocate for an SRI mutual fund company. The following is my personal take on the industry. It is not the opinion of my employer, should you by any chance be able to figure out who that is.

For historical and marketing reasons, SRI is commonly understood to mean "investing in good company." Unfortunately, unless you are a GWB Republican, you realize that the world is not black and white, and that --- as in many other parts of life --- there is no such thing as a "good" company or a "bad" company. Every company has good and bad practices; every company has some employees who are more progressive and some employees who just want to make money.

So, in my book, "screening" (i.e. excluding "bad" companies) is a feel-good measure for people who want the illusion that they are keeping their hands clean even though they are living in a global economy that pollutes the world and oppresses people. Screening does not, as far as I can tell, have any effect on corporate behavior.

So that's the down side. The up side is that shareholder advocacy has a very significant impact on corporate behavior. I do this every day I'm at work, and I see the results. Whether you care about global warming or gay rights or workers rights in the third world, or the depletion of Asian aquifers by big soda companies --- whatever the issue, there's a good chance that SRI shareholder activists are pushing companies, finding allies within the companies, pressuring laggards, and providing motivation and cover for people inside the companies who want to do the right thing.

It really does work, and the amount of money that SRI firms have under management really does make a difference. You help me do my work on global warming and pollution and political influence by investing with my company.

Now, as far as returns: I don't believe there is really much difference between the returns of actively managed SRI funds versus actively managed non-SRI funds, nor between SRI index funds and actively managed index funds. One place you may see a small difference is in the fees, which may be 0.5% to 1% higher for the SRI fund (one half to one percent higher). Those higher fees will, over time, reduce your returns by a corresponding amount. However, for that you can take solace in the fact that your participation in the world of Mamon is also be used to pressure the forces of Mamon to do the right thing.

As for buying individual stocks: it's hard to pick stocks, it's a lot of work, and on average (by definition) no one does better than average. If you choose to buy individual stocks, I believe that the most important thing from an ethical perspective is to read the proxy you get once a year --- at least skim it --- and vote on the proposals that you understand. Vote against excessive CEO pay. Vote in favor of companies doing something about global warming.

I'd personally rather see you buy ExxonMobil and Dupont than Starbucks and Dell, because XOM and DD need more shareholders who care. You take the dirtball to the public baths; the guy who is already clean doesn't need the trip to the baths as much.

Good luck, and thanks for thinking about this as you invest.
posted by alms at 7:12 PM on May 20, 2007 [5 favorites]

I'd chime in, but alms has done a better job than I could. I am completely pro-SRI funds, and I work for two SRI financial planners, but I'm in the states, and I have no idea how Canadian investing works.

One downside that alms didn't mention, is that although SRI funds do as good (and sometimes better, when you figure in the fines, clean-up costs, and lawsuits etc that the "dirtier" companies eventually have to deal with) as conventional funds in certain sectors, it's simply a smaller universe and there are sectors that just don't have good SRI options. (Commodities & foreign bond funds spring to mind.)

A lot of SRI comes down to what makes you comfortable. I agree with alms that in a lot of ways owning the DuPonts and Nikes are more productive, but some people can't sleep at night knowing they own a piece of the problem.

Another note on the shareholder activism- pretty much all SRI screens out companies whose core competency is something you don't want. For instance, although you might be able to get Nike to stop using sweatshops, if you're against the prison industry (which may not be relevant in Canada but is very relevant here in California) there is no point in investing in Corrections Corporation of America. All the shareholder activism in the world can't make them change their business.

I'm not sure I'm making sense. I didn't sleep enough last night. And all my info is US based so may be completely irrelevant anyway.
posted by small_ruminant at 8:20 PM on May 20, 2007

I was recently in a similar situation to yours (I'm in Canada too) and I decided not to invest in any ethical funds. I ended up taking the time to invest in stocks for companies that I felt had positive (or at the very worst neutral) environmental and social effects. For me this ended up being a lot if investment in renewable energy and energy R&D, with a few other companies thrown in. I know that this approach is riskier than a broader investment approach, but I'm willing to take the risk to own part of companies that I think are doing positive things. The other downside of this approach is the time involved in picking stocks, reading annual reports, etc.

There are two reasons that I didn't invest in any ethical funds: the relatively high MERs for the funds and the low ethical standards. All the Canadian funds touted as ethical that I looked at had relatively high MERs (Management Expense Ratios, i.e. the money that the fund takes as the fee for running it). It is quite significant to lose 2-3% every year from what you could otherwise earn (funds don't, on average, do better than the market as a whole or the major indices). The funds that I looked at were unimpressive from an ethical standpoint: as alms points out above, the screening process is unlikely to do much for you. I was also very unimpressed by the funds' shareholder advocacy work: it seemed like a bit of window dressing for the funds and the companies in question, but I didn't see any significant changes to any of the companies environmental or social effects. I felt that it would have been a better use of my money to send that extra 0.5-1% that the ethical funds tend to charge to advocacy groups that I support, rather than paying for the ethical funds' tepid advocacy.

If you do decide to invest in ethical funds, do some careful research before making the purchase to find out which funds do work that you think is worthwhile. If you have the time, invest in companies that you do support (and that you think will make you money, of course) directly. If you want to discuss this further, my email is in my profile.
posted by ssg at 9:45 PM on May 20, 2007 [1 favorite]

Given that "ethical funds" almost always lag traditional funds, many people argue that you're better off to avoid them and simply invest to maximize your return and then donate to worthy causes as you see fit. Andrew Feinberg has a column about this in the June issue of Kiplinger's (it's not online, unfortunately).
posted by pmurray63 at 10:15 PM on May 20, 2007 [1 favorite]

I was recently challenged to answer this question about my own portfolio. Here is what I came up with:

I won't own stock in a company that does things I think it oughtn't be doing. Companies like **** and *** irk me; [redacted] disgusts me. However, in general I prefer that social issues be addressed at the political level via regulation, rather than at the level of the market. The market is only looking for the cheapest and most profitable way to do things; withholding your money from evildoing corporations isn't enough, as it just means that someone less scrupulous than you will take the same profit from the fractional share of evil that you refused to buy.

The latter argument is, incidentally, a corollary of the "efficient markets" hypothesis.
posted by ikkyu2 at 11:59 PM on May 20, 2007

What pmurray63 said, and then some: I don't believe you can delegate your ethics. If making moral choices is that important to you, make your own. Don't expect someone else, especially not an institution as opposed to a person, to make the choices you would make.
posted by Robert Angelo at 6:37 AM on May 21, 2007

I see it as a way of voting with your money. If lots of people invest, together, in a SRI fund, then that fund gains power. There may be just token efforts now, but in time, as SRI funds gain popularity (and word is slowly spreading, even now), the message will be clear: all these people, with this much money, _do_ in fact care about the social policies of corporations.

The traditional market is currently "blind" to these social effects, at least a little. No, you can't delegate your ethics. If you're going to invest in the market anyway, investing in a socially responsible way takes your financial support away from institutions that care only about "shareholder value", and puts all that financial power into saying, Yes, I care about the larger picture, and I want you, user of my money, to care, too.
posted by amtho at 6:46 AM on May 21, 2007

I work for a financial services company -- this is my own opinion and does not reflect the opinion of my firm, and also I'm not licensed to give professional financial advice.

Ethics are very difficult, especially when it comes to investing. We manage money for a variety of pension funds, many of which wish to place ethical restrictions of some sort (e.g., "no tobacco") in their guidelines.

In order to try to fulfil our clients' wishes, we subscribe to a number of data feeds which attempt to evaluate and classify companies' ethical risk.

What you find quite quickly is that the investment world is mostly made up of companies with affiliations that could be flagged as unethical. A very large soft drink conglomerate is owned by a very large tobacco-affiliated conglomerate. A very popular maker of mobile phones and computer chips just happens to have millions of its chips installed in millions of unexploded land mines around the world. And so forth.

So the question rapidly becomes, where do you want to draw the line?

Most ethical funds bite the bullet and take some amount of questionable ethic exposure just to provide enough alpha to be allowed to continue to exist.

That said, there is nothing demanding that you invest in a fund. If you feel strongly about your idea of ethical business, then just set up a basket of businesses you personally deem ethical, instruct your broker to buy and hold, and rebalance once a year. You won't make as much money as you would by investing in, e.g., the Vice Fund, but you clearly value your soul a lot more. And, your individually selected basket + rebalance would be very inexpensive in fees and management costs relative to any mutual fund.

Redisclaimer: I am not licensed to give professional financial advice; good luck.
posted by felix at 9:40 AM on May 21, 2007 [1 favorite]

Given that "ethical funds" almost always lag traditional funds.

This just isn't true. There are certainly studies that have shown that SRI returns lag traditional returns, but there are also studies that show the opposite. It all depends on which funds and which time periods you choose.

One thing that is undeniable is that investors who eschew oil companies are currently lagging the overall market because ExxonMobil, Chevron, and related companies have had huge runups in their already huge market caps. Over the next ten years, though, a lot of people think clean tech will outperform fossil fuels overall.
posted by alms at 4:01 PM on May 21, 2007

This just isn't true ...there are also studies that show the opposite.

Okay: "ethical funds" frequently lag traditional funds. I still think it's true more often than not, but I can't prove that right now.

I'll agree on your second point. The Feinberg column I mentioned earlier notes that funds specializing in green technology might do better in the future.

While I stand by my argument, here are a couple of articles from Morningstar about picking a fund. You may need to register (it's free):

Find The Right Socially Responsible Fund

SRI Fans Have Plenty of Good Core Options (This one is about a year old, so double-check its recommendations.)
posted by pmurray63 at 10:54 PM on May 21, 2007

it's great that socially-minded stakeholders convinced Company X to finally produce a sustainability report but --

I heard Tom Van Dyck and Patricia Jurewicz (of As You Sow) speak about SRI and shareholder activism -- very interesting. Van Dyck recommends some funds in this article. I haven't yet done too much research myself, but I did come away feeling like stringent SRI should improve returns (he had an awesome chart comparing SUV-dependent GM and Ford to hybrid-building Toyota) and being a fan of shareholder activism.

Two points I got about shareholder activism were 1) measurement is just the starting point, and then they start asking for improvements, and 2) they recognize they're the "good cop" and that they at least partially depend on "bad cop" picketers so they can say "hey, look at all the money you're losing money due to the picketing" or "hey, we're worried if you don't shape up, you'll face a costly boycott that permanently damages your brand." Hearing them acknowledge the limitations of shareholder activism while still pointing to instances where they were key hand-holders or catalysts, I was able to really appreciate what they do.

As for myself, I realized I don't have much moral compunction about index funds. Since they're not actively managed, I don't have to worry that the fund manager will go buy shares in expectation of some sheisty profit-boosting maneuver. I'm just letting my money rise and fall with the same corporate tide I happen to be living in -- give unto Caesar what is Caesar's and all that. Plus, it frees up my energy to do things that might make more difference than I'd make by perfectly allocating my rather meager holdings. :-)

On the other hand, when I have more time, I'd love to start researching individual investments, since I think it'd be fun to feel invested in companies doing cool things and working for positive change.
posted by salvia at 8:29 PM on May 27, 2007

Can You Build an Excellent All-SRI Portfolio?
Your chances are better these days, but it's still a big challenge.

(free reg may be required)
posted by pmurray63 at 10:46 PM on November 27, 2007