Socially Responsible Investing – An Alternative

Larry Swedroe had a wonderful piece a couple of weeks ago on the costs of building a portfolio on a foundation of socially responsible investing.

SRI vs. Impact

I had a conversation with a colleague who is more well versed than most in the subject — it seems that socially responsible investing (SRI) is a bit out of vogue with those in the know. Probably for the reasons Larry gives in his post. The new hotness is “impact investing”, which focuses on positive screening, finding attributes in a company that you like regardless of where they operate. An example would be the oil & gas sector, where I am told the big behemoths (Exxon, Conoco, Chevron, etc.) are actually the companies pushing the hardest toward more sustainable practices, since in the long run their survival depends on it. Standard SRI makes those a big no-buy zone, whereas impact investing might not.

Investing Optimally to Give Optimally

I have a rather different take on the matter, assuming the average Joe Blow with $1 to $1 million dollars is what we’re talking about here, I’m pretty sure the GTO (that’s ‘game theory optimal’ for the non-initiated) move is to invest in whatever you expect will give you the best returns.

Then, either when you die or clearly don’t need the money, giving it to causes that relate to what you care about. Not buying 200 shares of Exxon isn’t going to change anything, especially in the secondary market, because you’re just buying Exxon from a mutual fund or day trading dentist, and none of your money is going to or coming from the company itself. Giving a few extra thousand dollars to a local charity on the other hand, now that might have a real effect.

Real Impact Investing

Now, if you have some real cash, (and I’m going to skip a big group of tweeners here) say, $5 million+, you can start to make a real difference by investing in primary offerings. In other words, a company (usually still very small) takes your money and gives you shares. These are usually not publicly traded, and are extremely risky, which is why people put together funds of these things, to diversify. However, your $50k (along with a few other peoples’) might make the difference between the company being able to make payroll for a few more weeks, keeping the lights on, and making a big discovery that changes the world in a small way.

A Dish Best Served Rich

While I can appreciate the idea of not wanting to be an ‘owner’ of a company that operates in a way you don’t agree with, I think most SRI pitches are just that, a pitch intended to sell a fund. Plus, if something you really don’t agree with is legal and makes a ton of money, is there a better way to fight the power than to funnel the profits to a cause you care about? I can’t think of one.