Wednesday, October 17, 2007

Investment and Justice

A few days ago I wrote about investment for folks in the 20-40 range.

Conspicuously absent from that post was a broad discussion of how ethical considerations ought to impact investment decisions.

There are a few basic approaches to Socially Responsible Investing (SRI):
  • Negative Screening: this approach removes companies that the investor thinks are problematic. You might, for instance, eschew oil, military, or tobacco companies, any company that didn't offer domestic partner benefits, or any company doing business in Djibouti. Calvert offers a popular index fund with negative screens. The Social Investment Forum has more info here. Negative screening is premised on the hope that non-investment in bad companies will drive down their shareprices and incent better behavior.
  • Best of Class Investing: this approach involves investors investing in companies which are least bad in bad classes with the goal of rewarding less bad behavior and thereby punishing worst behavior. You might for instance avoid Exxon and its efforts designed to discredit climate change research and instead choose to invest in Beyond Petroleum who has more investment in alternative energy.
  • Active Ownership: In this approach you make investment decisions solely on the basis of financial calculus and business judgment. You use your portfolio to influence major firms through shareholder activism of various sorts like proxy proposals, voting, and letter writing.
Personally, I think Active Ownership is the most potent ethical investing approach. It creates the most momentum towards just outcomes and should have the best investment returns.

Personally, I invest with conventional financial firms and use index funds where possible as i described earlier. As my portfolio grows i expect to allocate 1-3% of it to bellow market investment activities designed to produce social returns such as:
  • investing in community redevelopment organizations who offer targeted loans to businesses and individuals designed to create desirable urban outcomes.
  • investing in global micro lending.
Additionally I commit to dispersing 10% (or more) of my post-tax income to justice creating activities. You can read more about my approach to tithing and what i did last year here.

Frankly, in one's 20s and much of one's 30s the amount in retirement savings accounts will be modest. The work of our hands is much more substantial in actually impacting the world than anything we do with our money. It is important to concentrate on the question of whether our day job makes a difference. Are we teaching a new generation of folks? Helping create political change? Economic change? Are we bringing people joy? Helping people learn? Creating culture? Is the world getting better because of what we do?

If the answer is no, we aren't making much of a difference in our days, that is an important problem to fix. Get in the habit of giving now. I recommend tithing highly. Eventually when you have saved lots of money and 1-3% is a sizeable sum in real dollars, start using those dollars towards justice investment.

If you are very excited about negative screening you can sacrifice 1-2% or so of returns to use Calvert's more expensive alternative to an S&P 500 index fund. If you earned a 11.2% return over 40 years as the S&P has, after 40 years you'd turn $1 into about $83. If on the other hand you earned 9.7% (1.5% less) in a negatively screened fund your $1 would turn into $37 after 40 years of compounding. Little differences in fees and returns make extraordinary differences in the long term. if there was a good negatively screened fund that mimicked the funds i recommended from vanguard at similar fees I'd recommend them. I don't think such funds exist and tend to think that negative screening makes at best a marginal impact on the companies invested and not invested in. A marginal social impact is a poor reason to accept half the return over 40 years.


At 10/17/2007 , Anonymous MoneyChangesThings said...

You are a young investor who has never been through a really bad investment year or years.
We invested money at The Reinvestment Fund in Philadelphia, at something like 2%. Around the tech stock bust and 9/11, it was actually our BEST investment.
There is a place in most people's investment portfolio for liquidity, and using locally owned banks and credit unions, or a community bank like ShoreBank or Wainwright Bank in Boston, is another way of knowing your money is circulating well. They offer CD's as well, if that fits into your picture.

At 10/17/2007 , Blogger ZT said...

Some years the market returns are below the 11.2% average over time. You mentioned one of those years above. Some years the market way outperforms the 11.2% average.
The CD will produce 2-5%, the Reinvestment Fund Investment made 3%.
In the 13 full years since the start of 1994 the S&P 500, for instance, lost money three times (2000, 2001, and 2002). It has had returns of 0-5% twice and 5-11.2% once. If you invested $1000 in that index 13 years ago, it would be worth about $4000 today. If you invested it in the TRF guaranteed 3% fund you'd have about $1600. That is a difference of $600 v. $3000. Needless to say, not a good investment strategy.

It'd be a very good alternative to outright charity work but is a poor alternative to investment.

At 10/18/2007 , Blogger BZ said...

You use your portfolio to influence major firms through shareholder activism of various sorts like proxy proposals, voting, and letter writing.

Do you have advice on how to do this? Is there any organized effort among people who own shares in index funds (and therefore in all the S&P 500 companies) to influence corporate policies?

At 10/18/2007 , Blogger ZT said...

There should be an organization forthcoming called the ShareOwner Education Group which may do organized shareholder rights work. There is a Union owned banks called Amalgumated which has a fund called the longview fund which is an index where they use the holdings to do progressive work of various sources. What efforts do folks know about?

At 7/02/2009 , Blogger ZT said...

The site has launched. is dedicated to creating a vast network of people invested in stocks, mutual funds, etc who want to make their voice heard. It should really make a difference in the next few years.


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