Alternative Approaches to Socially Responsible Investing

We share our members’ enthusiasm for socially responsible investments, but it does clash with our long-term, low-cost indexing strategy. We are not shy about airing our concerns about SRI options, because we want our members to be fully informed. In support of those wishing to pursue SRI, over the last six weeks our finance team has been hard at work screening available SRI options and coming up with a list of our favorites. We can now, one-on-one, offer specific investment advice for those interested in SRI.   We don’t discuss specific investment options publically because the appropriateness of an investment depends on individual circumstances.

For members not completely comfortable with moving to SRI, we offer some of the ways we’ve seen members think about alternatives to SRI investing :

1. Consumer dollars count far more than investment dollars

   Long-term, stock price is far less sensitive to pressure from an average individual investor than it is to an individual consumer. For instance, your investment in a massive index fund that holds 1% of its shares in Exxon means that you often effectively own just a fraction of one share of Exxon. By contrast, by refraining from using Exxon stations, you are withholding revenue from its wholesale business that is orders of magnitude higher than your fractional share held in the index mutual fund. If you want to vote with your wallet, you get far greater bang for your buck by directing your consumer dollar than your investing dollar.

   Consumer dollars also offer a clear signal to companies about what kinds of products or behaviors the marketplace is demanding. This can range from the fair trade coffee that you buy from Peruvian farmers, or your continued boycott of Nestle products because of their promotion of breastmilk substitutes in poor countries. Every corporate management team is on the hook to increase revenue and return value to shareholders.  As the demand for environmentally safe, ethically-produced products increase, corporate management teams will actively start to incorporate such offerings.

2. My financial goals need not be subordinate to my aspirations as a good global citizen.

   Unless you have truly sizable investing assets, your SRI investment is a stand on principle rather than an action with practical consequences as a market signal. While historically the performance gap between broad indexes and SRI funds has been narrow but significant, SRI funds’ overweighed exposure to financial firms means current performance is likely to lag even further. One has to weigh this higher risk and lower performance against the principle behind SRI.

3. I will invest only a certain portion of my portfolio in SRI funds, as a compromise between achieving my financial goals and being a responsible investor.

   We often see 401k and TSP accounts with investment dollars split evenly between available choices. In the absence of good information, one’s instinct is to hedge bets and spread the money around. In effect, members who invest only a portion of their portfolio in SRI are exhibiting similar behavior.  This isn’t the most appealing strategy from our point of view, but it is actually quite popular among our members (especially those that don’t have SRI options in their 401k).

4. I will offset the non-SRI component of my investments by donating to a charity.

   This is equivalent to flying to Paris and back for a summer vacation, and offsetting your carbon emissions by donating to a reforestation project. This has great appeal in theory, but in practice it is quite complicated to estimate the portion of your investment profits coming from irresponsible companies. When members have pursued this strategy, we often just take a ballpark estimate (like 5% of investment gains) and are content with that. The beauty of using this method is that you don’t suffer reduced investment gains in your tax-advantaged retirement accounts (because you are using broad-market investments instead of SRI) and the donations are done with funds external to these retirement accounts.

Ultimately, the choice is yours. The very fact that you’re thinking about these issues demonstrates that you are a concerned citizen. At Community Ladders, we are here to help you make an informed decision, and to support you in whatever decision you make.  We will continue to monitor SRI fund offerings as the sector develops, and will alert members personally of better SRI options.