“Socially Responsible” Investing Dialogue Heats Up
It’s Climate Week, so it’s no surprise that some of the talk has turned to what some people call socially responsible investing. What is socially responsible investing anyway?
With all the talk about socially responsible investing, we could stand to examine what this even means and how well what is supposed to be socially responsible actually achieves that goal, or how it even might.
Emotions and investing don’t really go together, so the first thing we need to do is set this aside lest we get thrown into the distorted thinking that being too emotional about our investments leads to. Emotions can be wonderful things, or they can harm us, and especially can if we use this as a substitute for clear thinking, which we so often do.
There is only one way to see how much of a problem that this might be causing us, and that’s to step back and evaluate the issue of socially responsible investing on its own merits rather than just raising our fists in anger like some are doing.
If we’re going to make statements like Matt Patsky of “socially responsible” investment firm Trillium, who boldly proclaims that “investing in a single index fund is immoral,” we’re going to need to actually defend such a position. Immoral is a strong word here, and if we dare to use a term like this, we need to be prepared to back it up if we hope to convince those outside the clique that will just simply raise their fists right alongside him and just proclaim that they are right.
Apparently investing in index funds, randomly in other words, isn’t socially responsible in the eyes of Patksy and others, to the extent that it is immoral, so we’re going to need to start by trying to figure out what socially irresponsible means when it comes to companies. If we fail to think on this properly, we’ll just be left with the definition of their simply doing things we don’t like personally, which in itself does not shed any light on the matter other than being evidence that we have become angry.
We actually have a pretty widely accepted definition of a socially responsible company, as vague as it may be, which is a company that acts in a manner that not only benefits the company but also benefits society. That’s actually too strong of a definition here, as the most we will be able to do is to require them to not harm society overall, as these companies are not structured to primary benefit society per se but to instead benefit the owners.
We therefore need persuasive reasons to limit their pursuing this, and this is where the harm criterion comes in, where their goals may unduly impede others from pursuing their own utility and we therefore may have a rightful claim against them.
We Do Need to Limit Activity, But Need to Do This Responsibly and Sensibly
Shareholders own the right to make certain decisions about their company, where they will be seeking to maximize their utility. We place legal and regulatory restraints on them so they stay in bounds, and as long as they do so, they are entitled to choose as they wish, as we are always entitled to do when it comes to determining the use of resources under our control.
If your neighbor loses his job and comes begging at your door for financial assistance, while we might think that it helping out would be the socially responsible thing to do, we are not obliged here of course, although we are free to extend whatever charity we see fit, but we must understand that what is being sought is charity.
When someone else disagrees with the level of charity that we provide, it is irresponsible to accuse us of acting wrongly, as the wrongness here boils down to our disagreeing and our insisting that we are right and they are not and they must therefore submit to our preferences about how they should spend their money.
The same principle applies to companies as well, even though it seems easier to become angry with companies that act in ways that upset us. There are cases where they may actually go out of bounds, and even cases where the boundary may not be set in the right place and not protect us from harm enough. There’s certainly plenty of this that goes on, as a result of all the lobbying that companies do in order that the boundaries be set in a way that is more favorable to them but fails to some degree in their duty to protect the public.
It is therefore not difficult at all to find companies that we may have a legitimate gripe with, and while companies and their shareholders are entitled to pursue whatever goals they please, this cannot include genuinely irresponsible acts that cause significant enough harm to others that these acts need to be limited or curtailed.
You won’t find much of a receptive audience if you appeal to the companies themselves, because they have chosen to seek to maximize their utility and they will naturally prefer that this not be restrained. If we could just ask them politely and that worked, we wouldn’t need the law or regulations to keep them in bounds, and although companies do act responsibly a lot of the time, we need a back-up plan in case they do not.
We therefore can say that companies are clearly under the constraints of acting responsibly by way of force, but we then need to define what irresponsible means, which will need to come down to what activities could be demonstrated to constitute a breach, where the line needs to be drawn in other words.
This is not a simple matter though. We could just say that any company who pollutes at all should be stopped from doing so, but life is all about choices and involves both costs and benefits, which need to be weighed prior to our wanting to curtail something.
It is this part that the social activists miss, and they actually often wish us to take actions which will actually be against the public and social interest, where they actually not only fail to achieve their goal of promoting social welfare but are seeking to diminish it.
We therefore need to reframe the issue as companies acting socially irresponsibly meaning that they are acting in a way that will produce harm to society that results in a net social loss. The net social loss calculation is what this what will decide this, not the fact that we see a certain action like a company polluting and look to vilify it without any further thought, as if our anger or disagreement was sufficient cause.
Decisions Always Require Us to Weigh the Costs and Benefits
The biggest problem with the climate change movement is that they refuse to think practically and their focus on climate change has served to blind them to other considerations. This has even led to suggestions that, if implemented, would simply destroy our society and way of life and cause not only social harm but even social destruction.
People miss this because they don’t think this through and they stop at the point where people are predicting unwanted changes in the future and we need to correct this, the consequences be damned. It’s easy to damn them if you don’t even consider them as it turns out.
A big target of the socially responsible investing set is oil companies, which is actually more curious than we might initially think because they are not even the proximate cause of this so-called crime, it is actually the consumers of this oil that do the dirty deeds, making things for society, heating our homes, driving our cars, and so on.
We then reason that since all these things are held to be socially irresponsible, and this oil is therefore evil, the oil companies now become the pushers and we want to cut down on the pushing. No one is actually pushing anything on anyone here though.
The problem here is that oil provides both huge social benefits and some social costs, and when we compare the two, the comparison is not even close. This is not to say that we shouldn’t be seeking the optimal balance between enjoying the benefits that oil provides us and limiting the harm to a reasonable level, and there will be a point where the marginal benefits of oil becomes exceeded by the marginal social costs, and this is where we may sensibly draw the line.
People pay a little more for their cars given that we have installed pollution control devices in them now, although we’ve decided that the benefits to society of reducing pollution is worth this cost. It has to be, otherwise we’re putting social welfare down rather than up.
To call an oil company socially irresponsible just because they sell oil that is used to pollute, as well as polluting some themselves, doesn’t seem to be all that unreasonable provided that we just stop there and think no more about the matter. We do need to think about what we are saying though, and especially if we want to create good arguments to persuade others.
Social responsibility is not such a simple matter therefore, and we need to be much more careful when we bandy this term around to not just be appealing to the choir who are singing our tune already, because all that will accomplish is to further polarize things.
Claiming that it is immoral to invest in stocks that a certain person does not like is simply asinine, for more than just one reason. There’s the dispute about whether or not there is social irresponsibility involved in the first place, but an even bigger issue is how our buying or not buying these index funds is going to make any difference anyway.
The second part actually ends up being pretty amusing, and is evidence that those who hold these views don’t have much of an idea how this all works.
There are a certain number of shares that are held in the companies in a stock index, and whether you buy it or not, someone will own all these shares. Regardless of how these companies behave, these shares will be continued to be owned by someone, and whether it’s you or the person across the street has no material bearing on the company.
The company actually sold their shares to the public some time ago and already got paid, and if we really do want to impact them financially, we may want to actually want to buy more collectively and bid their share price up to make it more expensive for the company to buy these shares back.
It’s not that this matters anyway, because the company will be happy enough to have our shares go up and that’s the only reason why they buy back shares in the first place. This does not benefit the company’s bottom line because share price really doesn’t have anything to do with the company itself, and this includes whether we invest in them or not.
What the activists really want us to do of course is to invest in their funds, containing companies that they have given their seal of approval to, which will force us to set aside our own goals of investing in favor of the goals of these activists. Perhaps we have activist leanings ourselves, and will derive enough satisfaction out of investing this way to make up for the financial losses that we are accepting.
Whether or not this is the case needs to be left up to the facts and not whether or not certain fund managers or other activists are made happy. Seeking to persuade us with bad arguments that only serve the purpose of seeking to incite anger and discourage us from any sort of analysis is really what is objectionable here, and is at best a stupid argument.
We need to be using the term socially responsible more responsibly, and achieving social responsibility has to involve an overall assessment of the social impact of something before we just screw up our faces and deem things wrong because we do not like them. If we want others to frown along with us and especially when we want to turn their smiles to frowns, we’re going to need much more than a superficial understanding of the issues to accomplish this.
Editor, MarketReview.com
Eric has a deep understanding of what moves prices and how we can predict them to take advantage. He also understands why so many traders fail and how they may help themselves.
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