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Alex's guide to ethical investing

Over the last few years, so called ethical investing has risen in popularity. This generally takes the guise of giving money to fund managers who tell you that they invest in ethical companies. Or, more often, don't invest in unethical ones. Of course, unethical generally means "does things against the biases of the sort of people who are likely to invest in 'ethical investments'". This can mean that industries like mining and nuclear get left out, industries I have no problem with in principle, while industries like banking or insurance, who, by and large, are scum, get heavily invested in.

By the way, nothing in this entry is intended as specific investment advice. It is solely provided as food for thought when making your own investment decisions. And any other disclaimers which are just glorified ways of saying, "don't sue me if you make a cock-up of managing your own life and want to blame someone else".

But the question of "whose ethics" notwithstanding, I still disagree with that notion of ethical investing. First, I need to just say a bit about the nature of capital markets. For simplicity, we will consider that there are two types of share transactions: when a company issues shares in exchange for money, and when an individual sells shares to another individual.

In the former case, the company issues those shares to finance some level of the company's activities. Consequently, any time you buy these shares, you help enable a company's activities. This can take forms such as an initial public offering or a dividend reinvestment.

In the other case, the only effects this has on the company you buy shares in are transaction costs and the perception of the value of those shares (important if they want to raise more capital). There is only a very limited benefit to the company, if any.

The reason I distinguish between the two cases is that they are important for ethical investing.

Let's assume for simplicity that there are good, neutral and bad companies. Good companies are one's that you want to see grow and thrive. Neutral ones are ones that you are hapy to see grow because of the economic benefits but won't really shed any tears if they go out backwards. Bad ones are ones that, either because of industry or their behaviour, you'd be happy to see the back of them.

I'll also assume, for simplicity, that you are investing with the desire to make money. I will ignore the case where you buy some level of ownership of a company for the sole purpose of being an activist and effecting change, even if it damages your investment. Indeed, I'll assume you own a share of a company, but otherwise stay silent, letting the other owners make decisions as to the fate and performance of the company.

Now, I'm sure long time readers of this site have probably worked out what I am about to advocate. Particularly as they probably know I don't, in general, like empty symbolism. To confirm or surprise as the case may be, here are the rules:

When giving money to a company in exchange for shares, try to only buy shares in good or neutral companies. Never buy in bad ones. The reason is that this money makes a difference to the company, and every additional dollar is a dollar more the company has to do what they will (or to do what they do). For example, every pound in shares you buy in Haemair is a pound more Haemair has to develop a prosthetic lung and save lots of lives. Every dollar you give to an arms company is another dollar they have to produce things which kill people. It all depends on where your ethics and priorities lie, as well as what opportunities are available for investment.

When buying shares in an on-market transaction, do whatever you like. Guns. Tobacco. Banking. Nuclear. Gambling. Alcohol. Asbestos. Fast food. Mining. Meat. The music industry. Animal testing. Drugs. Slavery. Insurance.

Ok, I apologise for the last one. It was a little excessive.

Anyway, buy into whoever you want. The only caveat is that you aren't allowed to participate in dividend reinvestment programs for bad companies. In fact, you could make a claim that, by taking money out of companies in the form of dividends, you are being extra ethical! More importantly, if you consider your choice of ethics to be better than other people's, you can even take the money from a company in a bad industry and invest it in closing down the industry (e.g., you could use dividends from money invested in Phillip Morris to help fund quit programs or anti-obesity measures, depending on which matter you think is worse.)

So, in (interim) summary: give money to good companies when it will make a difference, don't give money to bad companies when it will make a difference, do what you like when it will barely register.

Now the far more important side of investing. The one that is rarely considered in ethical terms except in extreme cases: what you spend and where. I do remember being told, when I was little, not to buy fish fingers from a South African company (during the apartheid years) because of opposition to the discrimination. This was the exception though, not the norm. In general, I was allowed to by food from companies owned by cigarette companies and other companies that would have otherwise been considered immoral.

I consider poor service immoral. That is at the heart of the boycott list which will one day actually be formalised. I consider microsoft's behaviour immoral and am happy to not use their products as a result (and have a better performing computer as a result). In general, though, I figure 99% of companies are amoral and adopt a live and let live approach. More importantly, in general (unless you are rich enough that you don't need investment advice from a 28 year old engineer - this would be 100% of the population - but I hope you follow my meaning), which products you buy makes far more difference than who you own. Yes, it might be more difficult than just not buying shares in a company that drills for beer, but that's the way the world is - if ou want to make a difference via your ethical approach to investing, it does become difficult.

Oh. By the way. Another form of highly ethical investing is to make unsolicited donations to 28 year old engineers who give unsolicited advice on ethical investments and all sorts of other things on their website.


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