Is it possible to be an ethical investor?


“Vote with your wallet.” “Put your money where your mouth is.” Where we spend our money matters.

I’m assuming that there are certain companies that do not align with your personal ethical code, so you would not want to support them financially. I can think of quite a few companies that I would not want to give my money to, through investing or otherwise.

And yet I do. And it can be difficult to find a way around it.

Investing by default is ethically tricky

Here is a list of the companies listed in the S&P 500, a standard investing benchmark.

Here are just a few of the companies in that list:

  • Archer-Daniels-Midland
  • Coca-Cola
  • Exxon Mobil
  • McDonald’s
  • Monsanto
  • Wal-Mart

Now, regardless of anyone’s politics, it’s not a stretch to say that a few of these companies might not be on your top 10 favorite companies list.

And yet, if I’m to invest in the Vanguard 500 (a fund that tracks the S&P 500), then some of our money is going to these companies, whether we want it or not.

Social Choice

So are there any mutual funds that we can invest in that exclude certain companies? Is there such thing as “ethical investing?”

This field appears to be relatively new, but growing. TIAA-CREF has a Social Choice mutual fund which “seeks a favorable long-term rate of return … while giving special consideration to certain social criteria.” These criteria include companies that are “strong stewards of the environment” and “managing their companies in an exemplary and ethical manner” Finally, a way to excise the companies that I don’t want to support!

An unexpected benefit

The cynic in me wondered whether a fund like this is going to be as well-performing as a normal (unethical?) mutual fund.

Perhaps that’s not so cynical. After all, a company that has more in mind than just the bottom line is more likely to be less exploitative, and this does affect the bottom line. (After all, it is cheaper to clear cut a forest than it is to harvest it sustainably.)

Using Google Finance to compare the TIAA-CREF Social Choice fund with a few variants of the Russell 3000 (the fund that the Social Choice fund is based on), I find the the data inconclusive. (Morningstar is even more inconclusive.) There’s no sense that investing in the Social Choice fund greatly diminishes your potential returns. Maybe a little bit, but not much. Is the difference worth it? You tell me.

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Social Choice fund is TICRX.
Social Choice fund is TICRX.

Watch this space

Now, to put in perspective the changing nature of this landscape, I distinctly remember a few years ago looking at the holdings of the Social Choice fund, and finding some companies that I was unhappy to see. I can’t remember exactly which ones, but they seemed out of line with an ethical investing mandate.

But looking at the list of holdings now, the obvious candidates were nowhere to be found. Perhaps they were once there and had been removed? It appears that TIAA-CREF listens to public pressure, which is reassuring.

I also don’t want to single out just this one particular fund. I write about it because it’s the fund that I’m most familiar with in this space. (Full disclosure is that I own some of it.) Many companies are coming out with ethical-based funds, so the options are out there.

Where do you draw the line?

A problem with this investment strategy can be that because someone else is picking your companies for you, the list of companies may not entirely align with your principles. For example, a fund may not have any tobacco companies, but still support companies that test on animals.

This may be one of those situations where we need to accept that there are limits to what we can reasonably expect. To truly reflect our ethics in investing, we would need to pick our list of companies ourselves, but then we are back to the problem of picking individual companies (which is inefficient and unsustainable). Sometimes, the best we can do is the best we can do.

An alternate view

There is an argument for investing in the Whatever They Want Fund (WTWFX)* and then taking the “extra” return and investing it in the companies that align with your principles. This idea seems squarely in the vein of the old American greats like Rockefeller and Vanderbilt, building great public works on the backs of a lifetime of questionable business practices.

But I don’t think we should entirely wait until “later” to start promoting our principles. If you’re concerned about returns, why not invest a portion in one of these socially-conscious funds? Diversification is the key, after all.

If nothing else, what we can do right now is continue to support our local businesses, ones that we know are worth supporting. Investing is more than just your retirement portfolio, after all.

In short, there are more options than ever today for those who wish to spend their money in a way that aligns with their ethics. Investing is just one way, but it is a way.

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But enough about me. Do you factor ethics in to your investment strategy?

* Not a real fund.

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