Balancing Ethics and Investing

 

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Personally, investing can seem like a minefield of moral and ethical dilemmas. How do you navigate it? How do you go about balancing ethics and investing?


 

Index Funds

Learning to invest your money safely and properly in the stock market is tough enough. Adding in moral and ethical considerations exponentially complicates the process. It is probably why this is an area that is not very widely discussed in the world of personal finance.

We invest primarily in index funds. Index funds are a great way to invest in the stock market because of 1) Diversification and 2) Simplicity.

Diversification

Diversification is important because it lowers risk. Would you carry all your money in cash with you all the time? Or would you rather spread it out over different banks? With index funds, you buy the whole basket of stocks in specific stock index. For example, in an index fund tracking the S&P 500, you own a piece of every stock in the 500 largest companies in the US.

Simplicity

Along with diversification, index funds bring simplicity to investing. Since you don’t have to pull out a crystal ball and try to see what combination of stocks will perform for you in the future, there is little complexity involved with the process. All you have to do is purchase an index fund. You get a piece of every company in the index. You gain the average return of all of the companies in the index. Simple.

Ethical Complexities

Picking individual stocks leads to further complexity in an investment portfolio. It moves away from the simplicity and elegance of an index fund.

However, if you chose to pick your own stocks for your investments, you could choose to align your investing with companies that match your values and avoid companies you don’t agree with. The freedom to choose your own investments, however, come with increased risks.

On the flip side, if you invest through index funds, you lower risk through diversification, but it comes with holding investments in companies you might not agree with.

For example, if you are against smoking and you had money in an index fund tracking the S&P 500, you would own a piece of the Altria Group, under which Philip Morris operates. Or say you are against genetically modified foods. Well too bad, you would be owning a piece of Monsanto.

Words of the Wise

The majority of the advice I have received from those older and wiser than me about investing is to ignore these concerns. You need to maximize your returns. You need to remove emotions from investing. If you want to index, you have to take the good, the bad, and the ugly.

But it is difficult to simply ignore these ethical and moral considerations. No matter how tightly I try to shut them out, they inevitably seep through to consciousness. Maybe I think too much. I probably do.

I don’t have an answer to my own question. Not yet.

How do you tackle ethical and moral considerations when it comes to investing?

  • All I have are index funds or mutual funds for retirement so far, so this topic has come up before. Although I might not come across like one in my posts and comments I am an extreme environmentalist because of the field I work in, specifically where I currently work.

    My bigger concerns are with company’s that have poor track records with environmental issues. What I ended up learning from a few colleagues (who worked with environmental initiatives in the UN) is that a lot of the bigger companies have great sustainability measures in place, they just don’t actively broadcast (aka “advertise”) them because of an increased standard being required after that.

    Now that doesn’t ease all my concerns obviously, but SRI is a difficult thing to do to return a profit, so there becomes a grey-area where my personal beliefs don’t fully line up with the overall index. But I’m hedging my bets by using the index fund until I get into more selected dividend-producing investing.

    • That’s very interesting. Do you think you would ever feel like you can diversify adequately outside of an index? One of the appeals of indexing is the wide diversification that lowers risk to overall market risk rather than individual company risk. I think I’ll personally be torn for a while longer on the most efficient and optimal way to stay true to personal ethics and morals while investin.

  • I have had this talk with my wife and friends. We don’t own any tobacco companies simply because we don’t support smoking. We own some gas, oil, and pipeline companies. While I’m against the Northern Pipeline project, I’m an Enbridge shareholder. The way I see it, I can protest all I want, if I’m a share owner I actually have a say in the company and maybe I can influence how the company operates through my AGM votes.

    Some of my friends won’t even invest in index funds because these index funds have Enbridge, Kinder Morgan, Philip Morris, and likes. If this is the case I really don’t know what they can invest in.

    • I think I’d rather be invested and come to a conclusion on how to satisfy personal ethics and morality later than to stay out. The world is going to keep turning no matter how much I stamp my feet in protest about my personal ethical choices. I don’t know if that is a cop out but my personal approach has always been to play the game than sit on the sidelines and complain. And I have no interest in wasting my time becoming a martyr on whatever ethical personal considerations.

  • I’d like to think I know what goes on but mutual funds are hundreds of companies. We have all worked for some companies where we would probably have issues with management and their ethical decisions. There are many factors including treatment of workers, child labor, etc…that keep costs down to boost profits for all of us investors. Lots to think about.

    • The only way to try to minimize any ethical concerns would be to know a company inside out and then only invest in companies that meet your standards. I’m afraid to do that, incredible time commitment must be put into researching a company and that might just not be worth it for most people. Quite a dilemma indeed!

      • What if there was nothing wrong with the company, but with the owner? For example Chick-fil-a is probably a perfectly fine company, they don’t do anything that seems to fall into a moral gray area (unless you are vegetarian perhaps). But the owner was known for being a symbol for intolerance to the gay community? There’s nothing technically wrong with the company, but the owner is a … Jerk. Let’s just say jerk, since I can’t think of stronger words that are not too vulgar.

        Or the owner of the LA Clippers was the same way, he was a racist “jerk” but there was nothing wrong with the organization itself.

  • M

    It’s one of my principles to never go against my own conscience. I do have some active and passive funds which have small portions in tobacco companies. In currently looking for alternatives, because I don’t want to profit from something which causes suchsuch suffering and long term health problems. Similarly, I wouldn’t knowingly invest in Monsanto and the like.

    Emotion and conscience are always there, i not believe we should shut them out, but listen to them and then make a reasoned and thoughtful choice. Of you are going to feel bad afterwards, I always think it’s best not to make that choice. That helps me sleep well at night.

    I realise that there are no perfect solutions, perfect companies, perfect investments, but that we live in an imperfect world. However, we can make choices which we hope would not support those things we believe are damaging the world even more.

    • It’s difficult for me because a huge part of my investing philosophy is rooted in passive index funds. The theory behind holding broad index funds really appeals to me and the diversification aspect really does minimize individual company risk. Still searching for the perfect solution I’m afraid!

      • M

        I also believe in passive index funds, however I wish there were a version where you could opt out of tobacco or whatever. For my son’s investments, it is in some ways not worth buying individual shares until there is a substantial amount of money/value in his accounts. I’m only putting in £30 to each account per month, so I can’t really buy shares, even at the £1.50 discount rate that is still a 5% charge. The same goes for my SIPP (retirement acc.) – it costs £10+ to deal in shares but it is free to deal funds. I only put in £80 per month, and receive a tax rebate of £20 after a few weeks. That means I either let my money sit there, unemployed, wasting time, and losing value, or I put it into funds – which may include tobacco companies…

        We do have to make compromises sometimes, but for me I know that this is only a temporary situation and we will hopefully be able to buy shares in individual companies for my son and for my retirement acc. in the not-too-distant future.

        • “I also believe in passive index funds, however I wish there were a version where you could opt out of tobacco or whatever.”

          There sort of is: there are funds that attempt to create social or ethical indexes. Of course, you may not have the same ethical issues as the creator of the index. For instance, there was one blogger who boasted that she didn’t believe in the environmental devastation of the oil sands, and so she only invested in the Jantzi social index funds — unfortunately she didn’t do her research and it turns out the 5th largest holding there is Suncor (the Jantzi people find Canadian oil more socially equitable than overseas oil, despite the environmental controversy).

          • M

            Yes, I have seen some ethical funds… but the ones available missed out quite a lot of things that I wouldn’t mind investing in, such as oil and defence companies. As you say, the creator of the fund does not always share the same views…

  • Recently I did a post on British American Tobacco and finished that with a note on moral standards and ethical considerations. While it is a great company to invest in, I just can’t get behind the business model myself.

    Taking all emotions out of investing is a solution to that, but also unnecesary since there are so many other great companies out there that you can invest in.

    Of course, I also hold some index funds which invest in tobacco companies. Here the value of index funding is more important to me than the 0.001% of the index fund’s holdings being in stocks I’m not too happy with.

    Ethics are a very personal thing and often there’s a very fine line between what people are willing to do and what not. To me directly investing in a company that I don’t agree with is a line I’d rather not cross.

    • I think I lean towards your statement that investing directly into a company that you have ethical and moral objections to would be the line. But I am always haunted that being in an index is just a step outside of directly investing in such a company. By handing the power to select the companies in an index to a portfolio manager of an index and calling it a day… is that any different than allowing someone else to commit an act you are against because you are not directly doing it yourself? Is that the same as doing it directly or does the act of giving the power to someone else to do it remove you from such moral hazard? I’m not sure!

      • I understand what you mean, but I’m too much of a pragmatist to worry about one or two companies out of a thousand in an index. I’d rather not have tobacco stocks in the index I’m buying, but that makes 99% of all investment types impossible except for directly buying stocks.

  • It’s a tricky situation. In addition to the issue of moving from a nice, passive index to having to make active decisions, how deep will you go on your ethical analysis? Tobacco companies might be easy targets, but will you also dig into executive and regular employee compensation to see if the companies have biases and glass ceilings in hiring even if the business itself is “ethical”? Plus some companies are just so large that they have effects in multiple ways: McDonalds may be a villain in food & nutrition, but stepped up to use the power of their supply chain to protect the rainforest [example not thoroughly researched].

    I figure trying to have any kind of ethical impact at the share purchase level is too hard. The individual investor (even collectively) is swamped by managed money, and anyway, the capital markets are just not very influential on the day-to-day operation of companies. So I suggest saving your time and effort (and profits) to volunteer (and donate) directly for (to) causes that will help achieve the things you want to see in the world, and just index your money.

    • Hmmm I think you have a solid point Potato.

      I remember this example from a university course on climate change (which naturally had a fair share of hippies in the class) where the most of the fairly extreme environmentalists/hippie students were very against Wal-Mart and Monsanto.

      We learned that Wal-Mart has been the company with the biggest impact on organic foods being sold in grocery stores, through their sheer size and supply chain.

      We also learned that the professor of the class, who was highly respected by all students as a leading figure in the university’s biology/climate change programs, once worked for Monsanto. Ironic to see the confusion on whether this professor was still a hero to the environmental movement or a villain for once being a scientist in the employ of an “evil” corporate giant.

  • Hi!

    I stumbled on your blog a few weeks ago while looking online for information about silver coins 😉 I’ve really enjoyed my time exploring your past posts and I wanted to mention how appropriate this post was for what I’ve been thinking about recently.

    I’m a recent post-secondary graduate and getting ready to jump into the investment market for the first time. How to balance my ethical/moral beliefs with a sound investment strategy is something that I’ve been trying to wrap my head around. I haven’t really been able to come up with anything concrete but I really enjoyed reading this post and the comments it initiated.

    Looking forward to what you post next,
    Thanks!

    • Haha that’s funny – it’s because this blog used to be called “The Silver Maple Leaf” and I’m pretty sure it was on the first page of google when searching for anything related to silver maple leafs/coins!

      Glad you came by and glad you enjoy the material!

      I think Potato’s comment above is probably the soundest way to approach investing – at least as a starting point. Shoot me an email if you ever want to chat investing or have any questions, would be happy to correspond!

      • Thanks! And of course in a little over two weeks I’ll have the big unveil of the book specifically to guide newbies looking to invest in Canada, so stay tuned Matthew & Steve…

        • Looking forward to it Potato! I’ll be tuned in intently for the next few weeks!

        • Hi!

          I’ll definitely be looking forward to it!

  • M

    once again Steve, you have provoked me to writing a reply so gigantic, that I had to cut and past it into an entirely new blog post, or else it would look like I was hogging your comment thread…

    • That’s amazing! I’m glad it provoked you enough to make it into a blog post! A lot of my posts are also inspired after reading some particularly tantalizing and I have a need to hash it out further on my own!!

      • M

        I think we’re a lot alike. Do you also like SF? Ursula Le Guin is awesome. Taking those thought experiments to a rather larger level than a mere blog post.

        • Sorry for getting back to you so late M. I’m not sure what/who SF is? And I’ve never heard of Ursula Le Guin but I’ll check her out – any recommendations on where I should start with her?

          • SF is sci-fi/science fiction & fantasy. Ursula K. LeGuin is a prolific author in the genre. I haven’t read enough of her stuff to say where to start. Earthsea maybe?

          • Interesting – thanks for the suggestion!

          • M

            The Dispossessed – it’s about two different worlds, one is a completely rationalised, pragmatic, but technically anarchic society, and this is contrasted against a capitalist world. It’s a fascinating read and probably fits in quote well with our discussion here!

  • It may have been said before but the first time I heard it was in an article by Scott Adams (the creator of Dilbert), “Invest in companies you hate.” of course in the article he also states not to take investment advise from a cartoonist, so you may want to take it all with a grain of salt. I would reiterate his points but it may be better to just read the article:

    http://online.wsj.com/articles/SB10001424052748704025304575285000265955016

    But aside from many of the points he makes I personally have no real issue with morally gray companies and here’s why, we’re all adults here. People are free to choose to do whatever they want. Personally I don’t smoke, I think it’s kinda gross, but I would have no problems investing in Phillip Morris. I know, I know, “but they market to kids!” Maybe they do, but are you telling me that at the age of 10 you didn’t know that cigarettes were addictive, caused cancer, and were horrible for your health? I might believe you if you were born before 1960 but in the modern world I just don’t believe it. Maybe in other parts of the world they don’t get the same D.A.R.E. classes I had growing up but I’m not about to make decisions based on things I don’t know.

    But what about things like genetically modified food? Well, if I have any issues with GMO food then I won’t eat it, but that doesn’t mean I will hold a grudge against anyone that does. I have a few vegan and vegetarian friends who get all up in arms about me eating meat yet I never complain to them about how gross I think kale is. People are free to choose to do the things they want, and even if I don’t like companies like Apple because it’s like some sort of strange cult of $400 devices that I never understood. It doesn’t mean I’m not going to invest and profit off of all of it’s followers just because I don’t like the company.

    Or another one is companies that make bombs for war, I don’t support most modern wars, I believe the real motivations behind some of them come down to oil and other BS that I just don’t agree with, I think the wars over basic freedoms are over (except in acceptance of gay rights I suppose but those are not necessarily wars by definition… but perhaps they should be). I may not support wars, but it doesn’t mean I’m going to pretend like not funding those companies will make war end. If I cared to justify it, then I would say that while I don’t support war, I support our troops. But I don’t feel the need to make justifications for my investments.

    Or then there’s medical marijuana, people are free to choose to do what they want for medical or non-medical reasons. But that is one industry where I won’t be investing cause I think it’s overhyped and not going to make any decent returns anyways because a lot of stoners decided they wanted their first investments to be in pot companies. Either way, I have no moral issues with investing in them.

    • Hmmmm interesting (and detailed) response! Have you thought of turning it into a post?? I think it’d make a really good post!

      • Actually I have thought about turning this into a blog post, not sure exactly when I will do it but since I just wrote a significant amount of it most of the work seems done! 🙂

        • Exactly! Seems like you’ve got the foundations for a solid post, just need to spruce it up with some editing and some more points and looks like an awesome post 😀

  • Tim

    Really interesting post. I can speak as someone who has been doing ESG investing for over a year.

    When I started out over a year ago I was a bit of an idealist. And I researched like crazy to create the perfect-in-every-way balanced portfolio. This included ETFs that were tracking socially-responsible indexes.

    About 6 months ago my international ETF (EAPS) was shuttered. Attempting to roll my own index would be painful and cost-prohibitive, maybe even impossible if I wanted decent diversification, so I just opted for VXUS as a replacement.

    In a conversation with my brother, I asked if he was using any social indexes (he wasn’t) and why not? His answer seemed to make a lot of sense. Essentially, when you invest in an index you are not specifically choosing to invest in say, Phillip Morris (fill in the blank), you’re buying the whole economy.

    And where do you draw the line? Don’t invest in any retail chains that sell tobacco? And as others have stated, what about the ethics and morals of the people within an otherwise ethical business? You’ve got to dig pretty deep (impossible) to find that info. At that point maybe you need to consider whether you should be investing in capital markets at all.

    So after some experience and a lot of thinking, I believe my views have changed on this. I still use one ESG fund because I’ve always held it, but at some point I may switch it to a mainstream option.

    • I was having a conversation the other week with a friend on ESG funds. She told me that she pulled out of a fund to go with an ESG fund because that particular fund held Monsanto and few other companies she did not particularly support.

      I was left a little confused because, for me, ethics can be so complicated like you stated and how can you ever know where to draw the line? What if Monsanto is doing some really good science that will alter world hunger? What if there are some unethical scientists working there? But what if there are some really ethical and amazing scientists working there? Precisely where is the line?

      I’m not convinced with the argument that “I don’t support this or that company because I think they are evil.” Prove to me how they are evil, not just a “feeling” that they are because a bunch of other people say it is.

      I remember reading about how Wal-Mart – yes the EVIL Wal-Mart – was the biggest player in the organics food market in America. Because of their sheer size, they can demand and sell more organic food than anyone else. If you’re a left-leaning environmentalist, how do you quantify that in your judgement of Wal-Mart as some evil corporation?

      Oh, they pay low wages? Well how do you balance the fact that they are one of the largest employers in America? Sure the people are low paid, but they aren’t doing anything particularly skilled or demanding. If you want higher pay, no one is forcing you to stay working at Wal-Mart.

      Anyways, I’m starting to go off on a bit of a tangent. I invest in Vanguard index funds that cover the entire market. I’m not going to waste my time painstakingly picking my individual ethical companies because, like you said, that could even be comprised.

      Ugh, I’m just stuck in some weird twilight zone of moral relativism. I don’t think there really is an answer to how you can truly invest “ethically” and “morally”. I say just invest in broad-based index funds and then go out and create whatever ethical or moral change with the time that this investment option frees up for ya.