Socially Responsible Investing is a little like hit show “The Bachelorette”

by JT McGee

Socially responsible investing and the bacheloretteI can’t lie; I’ve been known to enjoy the first episode of “The Bachelorette” and “The Bachelor” a little more than a straight guy should.

There’s something remarkably interesting about the first episode in which the Bachlor/ette meets the “contestants” for the first time.

Personal finance connections buzz through my head as I watch; today, I’m all about socially responsible investing.

Socially Responsible Investing and Trash TV

Being an expert on trash TV let me fill you in on the basics of the show. The basic premise is that 30—I think it’s thirty—men or women go on this show to find love with the chosen “Bachelor” or “Bachelorette.”

In between the first and last show is a whole bunch of drama mama TV garbage to get you to pick your favorites and comment on the presumably stupid choices of the selected Bachelor.

Now let’s get back to my comfort zone: personal finance.

Socially responsible investors totally dig the idea of buying into firms that make “socially responsible” decisions.

Potential socially-responsible qualifiers include:

  • Enacting “green” policies to reduce carbon footprints
  • Avoiding “sin industries” like gambling, tobacco, alcohol, etc.
  • Paying workers in far-off lands above market wages to produce goods
  • Giving workers of all types reasonable working conditions (no sweat shops)

Socially responsible investing is a good thing, I suppose, in that people use their investment capital to invest in businesses which make ethical decisions, lead the charge in promoting human rights, or avoid “sin” markets that have negative societal impacts.

Socially responsible mutual fund lags SP 500 index.

This socially responsible mutual fund beat its benchmarks during the tech boom, but has failed to live up to its peers in the years since.

SRI Limits Choice

A socially responsible investor is a little like the individual Bachelor or Bachelorette looking for a person to call their husband and wife. While there are some 7 billion people on this third rock from the sun, the Bachelorette and Bachelor have to pick a mate from 30 pre-selected people.

Socially responsible investors have to pick from a smaller investment universe, as well. Since not every company that issues equity and debt securities is socially responsible, some have to be removed from the investment pool.

At any time you reduce your selection of investable securities you decrease possible returns. At any time you reduce your possible marriage matches, you also decrease the potential quality of a mate. Logical? I think so.

SRI in Practice

We can use analogies to draw a better connection between practical socially responsible investing, and the Bachelor show:

Equity (stock) investments – Shares of stock do not disappear if you choose not to own them. More importantly, distancing yourself from shares of non-SRI approved stock improves returns for non-SR investors. If firm A attracts capital from all investors, and firm B attracts capital from 90% of investors, then firm B, all else being equal, will sell for a lower price relative to its real valuation.

A parallel: Just because the Bachelor doesn’t date the hot blonde doesn’t mean other people won’t. And as far as the blonde goes, the other bachelors of the world benefit from decreased demand for this hot blonde. She still finds a match; it’s just not you.

Fixed-income (bond) investments – Fixed-income 101 tells us that bond prices trade inverse to their yields. Thus, if a lot of people reach out to buy a bond issued by a specific firm, the price rises, and the yields drop. On the next issue, the company will be able to borrow money at a lower price, since there is so much demand for their debt. This naturally reduces their operating costs, improves margins, and may, in some cases, give the firm an absolute competitive advantage.

A parallel: By throwing a bunch of marriage material men (investment capital) at The Bachelorette (the socially responsible company), The Bachelorette has an above-average selection of investment capital. She has an advantage over all other women in the world (non-socially responsible competitors of the SR firm).

Bottomline on SRI

Investors who allocate their investment dollars based on their moral or ethical values should consider how markets work before making investments.

Buying shares of stock in only socially responsible firms does little to ensure the viability of the company. Buying debt issues (bonds) of the chosen company does improve viability by giving SRI firms a competitive advantage in lower borrowing costs. Do note that these lower borrowing costs do come at a cost to you in the form of lower yields. However, unlike avoiding/piling into certain shares of stock, avoiding/piling into certain debt instruments does affect bottom line profits of a company.

Realize, though, that at any point you reduce available options based on data which is qualitative, not quantitative, you reduce your potential investment returns. Understand also that any money earned from your ownership of stock or bonds issued by non-socially responsible investments can be donated to non-profit entities that support your cause. I still think locavesting is a better alternative.

Readers,

Are you a socially responsible investor?

Photo by: Brian Tomlinson

{ 13 comments… read them below or add one }

Andrea @MoneyMastered August 31, 2011 at 19:55

While I’m about as left leaning/bleeding heart/tree hugging as they come, I would never limit my investments to only those companies deemed “socially responsible.” Very few businesses are truly socially responsible; many of them participate in just enough stuff to distract people from the socially irresponsible things they do the rest of the time. I don’t have time to research every company; when it comes to retirement, I want the ones that are going to make some money. If they also happen to be socially responsible in some way, that’s fantastic. 🙂

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JT September 1, 2011 at 13:07

Great point on businesses’ which claim social responsibility just for the marketing reasons. There is definitely something that separates social responsibility from real social responsibility.. I too think a lot of companies that earn the designation aren’t actually socially responsible.

We agree on the money, too. I let my money make money where it can best make money. We can all support causes that we wish to support with the income, anyway.

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Miss T @ Prairie Eco-Thrifter September 1, 2011 at 10:38

Very thought provoking post. I like Andrea am a very green living person and I also try to invest that way. In fact I have been doing a lot of research on different funds to make sure they are what I want to invest my money in. I do agree it causes some limitations but to me it is worth it. I couldn’t live with myself supporting something I don’t believe in.

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Sustainable PF September 1, 2011 at 14:54

Great article JT. I agree with Miss T and other parts of my life I try to follow certain ethics that I don’t breach. I won’t shop at Wal Mart due to it’s business practices and employee treatment – why would I want to invest in Wal Mart?

That being said, I am also cognizant of the damage the oil industry does to the earth, but I still drive (when it’s too far to bike/walk). That doesn’t mean I want to invest in oil stock however …

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Hunter @ Financially Consumed September 1, 2011 at 14:57

Love the analogy! I’m socially responsible to the extent that I let my fund manager make all the decisions they think will generate the highest return. Governments should be the only entity that restrict the flow of capital by the rule of law. If a company can legally do business then they can have my money to use productively if it fits the needs of my portfolio. Investors are grown-ups and can make up their own mind about consuming goods and services from so-called sin stocks. Many of these companies have over-sized cash-flow and have been outstanding investments for decades (tobacco).

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Daniel September 1, 2011 at 21:59

I have never seen the Bachelorette and I am not aligned with the analogy. The Bachelorette only has the options of men who are presented to her. She can only select from what is presented to her. Thus you are limiting SRI investing to a limited amount of companies that are SRI. Socially responsible investing should embrace far more than debt and equity. Consider “investing” in an energy efficient home? Perhaps “invest” in a co-op in a local community? What about investing in an organic farm?

Unlike the Bachelorette who is slated to marry one of 30 strangers at a specific time interval, the rest of us are free to date, marry, whenever we choose. However we must investigate our options finding mates through online dating, friends, or family. SRI is much like that, if you choose different avenues to find information, and do not limit yourself to a certain time frame, you might find far better options down the road.

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JT September 4, 2011 at 15:27

SRI in your own life may be a much better investment, actually, especially with solar panels providing an awesome yield right now. Good point.

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101 Centavos September 2, 2011 at 15:15

I think we define what is socially responsible according to our own internal moral compass. I have both smokes and booze stocks, and I’m OK w/ that. Others abhor them.
I don’t care much for Monsanto and its reckless adventures into genetically modified seed, and therefore choose not to invest in Monsanto directly in funds that have it as a core holding. Same goes for ADM, Tyson, Smithfields and other large food corporations.

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JT September 4, 2011 at 15:28

Wait, you mean that genetically modified foods have terrible consequences? 😛 There have been some crazy articles about Monsanto’s products lately. Definitely a company you’d want to avoid if you’re into the SRI thing.

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101 Centavos September 7, 2011 at 05:02

Only a little…. splicing a fish gene into corn plants would probably make a good backstory for a Japanese-style horror film.

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Invest It Wisely September 10, 2011 at 18:38

:S

I’m not 100% up to date with everything they do, but I have a strong distate for the patent BS…

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Sally September 6, 2011 at 23:52

Love the analogy! I’m socially responsible to the extent that I let my fund manager make all the decisions they think will generate the highest return.

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Invest It Wisely September 10, 2011 at 18:37

While I believe in ethics and in ethical practices, some of this socially responsible stuff is, quite simply, BS. Can’t name names, but didn’t stop a former employer from going down the tubes. Other “less responsible” companies have actually done far more for the consumer.

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