Socially Responsible Investing

Investments: Episode 12I had lunch with a client yesterday who suggested I share my thoughts on this topic with you. She and her husband had expressed a desire to avoid oil stocks in their portfolio as a matter of ethical conviction. I presented them with the following information to help them make their investment decisions:Stocks are traded on secondary markets. When you buy stock of Exxon or Haliburton or any other company none of your money goes to the company. It goes to the seller of the shares. Companies get their money at initial public offering.If you buy index funds it is true that some of your assets will be invested in oil companies but only as a matter of index tracking not because the fund manager has a penchant for oil.It's really difficult to separate the nasty from the nice. Microsoft sells a lot of software to Exxon. Green energy companies sell to tobacco companies. Invest in something because it is a good investment.Your job as an investor is to invest successfully so you can achieve your financial goals. If one of your goals is to reduce demand for oil, use your profits to put solar panels on your house and buy and electric car. You most likely put more profits in the oil companies' hands now through consumption than through investment.There is little evidence that socially responsible investment funds are worth the premium they charge. Voters and governments regulate business behavior. Managers of companies are required to maximize shareholder value and follow the laws of the land.

Category:

Education

Tags:

• oil
• investing
• investment
• stocks
• socially responsible

[gnawry]

Those with even the most rudimentary understanding of economics understand that there is both a monetary and non-monetary consideration to every decision they make, and the non-monetary benefits to investors are typically much higher for SRI.

[gnawry]

The primary/secondary distinction is idiotic and irrelevant.

I don't care about SRI--and acknowledge the premium placed on socially responsible cash flows--but you are wrong.

Buying a share of Exxon on the secondary market leads to higher payouts for oil company executives, cheaper debt/preferred stock, etc. Further, even though the cash flows are overpriced, those dividends are not the only reason people own socially responsible companies.