I 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.
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.
Are you a socially responsible investor?
Photo by: Brian Tomlinson