Why it’s difficult to be a socially conscious investor.

September 19, 2007 | By | 2 Replies More

The October 2007 edition of The Atlantic presents an article by Henry Blodget entitled “The Conscientious Investor.”  It is an in-depth discussion of what it means to engage in “socially responsible investing,” or SRI.  Up front, he makes the point that virtuous investing “can cost you.”

To illustrate, if you had invested $1000 in the S&P 500 in 1957, you would have made $124,000 by 2003.  On the other hand, if you’d invested $1000 in Philip Morris (now Altria) in 1957, you would’ve made $4.6 million.

The question Blodget asks to those who are dedicated to saving the world by investing in “good companies” is this:

Assuming perfect foresight back in 1957, would you really have foregone $4.5 million?  Be honest.  And welcome to the world of socially responsible investing.

The article is a good read, focusing hard on the difficulty of determining what companies are “good” and what companies are “bad.”  This determination is so difficult that many people consider the quest to invest in a responsible way to be “silly or offensive.”  Admittedly, there are some easy choices.  Imagine two entrepreneurs looking for your investment dollars.  “One who wants to burn national forests for charcoal and one who wants to power cars with sea water.”  That would be an easy choice.  Most choices, however, are entangled combinations of pros and cons. 

And then there’s the problem with trying to determine which companies are “good” and “bad.”  It must often be determined based upon incomplete information.

Did you visit that factory in Vietnam to make sure your favorite sneaker maker isn’t employing four-year-old slaves, or did you just take the company’s word for it?  Did the company visit every one of its suppliers’ factories? How do you know?  The inherently subjective judgments, combined with the reality that most companies are sinful in some areas and saintly in others, leads some observers to call such rankings absurd.


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About the Author ()

Erich Vieth is an attorney focusing on consumer law litigation and appellate practice. He is also a working musician and a writer, having founded Dangerous Intersection in 2006. Erich lives in the Shaw Neighborhood of St. Louis, Missouri, where he lives half-time with his two extraordinary daughters.

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  1. Dan Klarmann says:

    If you had invested in most of Phillip Morris' competitors in 1957, you'd have nothing now. It's easy to cherry pick a winner compared to an index. But indices (and index funds) always outperform stocks, on average.

    I've found that socially responsible mutual funds (Parnassus, Vanguard, etc) act much like index funds of socially responsible companies.

    I delegate my conscience to professional stock pickers with a specified agenda. So far, so good. In the 4 years I've held a Parnassus fund, I've gained 50% (12% average annual gain, including dividends).

    But this may be beside the point.

  2. A while ago I read an article about Bill Gates where he got criticized for his investment in companies that contradict the goals of his foundation. I have often wondered if rich philantropists who have earned their money through speculations that threatened whole economies or by investing in companies that exploit people and harm the environment are really benefactors of humanity. Maybe it would have been better if they had earned less money, but with a socially conscious mind.

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