Socially Responsible Investing

[MFM DOC]

Listened to the latest podcast today (#33) on my way to work, Questions from Med Students.  Was interested to hear what WCI would say about the med student question regarding socially responsible investing.  Totally agree with WCI assessment/advice.  I've been following the CA public employment pension retirement system and their "socially responsible investing" has been a disaster (so far) for CalPERS.

"Now the California Public Employees’ Retirement System is considering ending its 15-year-old ban on tobacco company investments after a consultant said the ban has cost the pension fund roughly $3 billion in lost profits."

https://economics21.org/html/theres-nothing-socially-responsible-about-low-pension-returns-1972.html

http://www.sacbee.com/news/business/article69836422.html

CalPERS initiated the policy back a few years back, it will be interesting to see how it pans out.

[VagabondMD]

I employ a small ESG-oriented position. Just because CalPERS was not successful investing with an ESG strategy does not mean that it cannot be done. The Parnassus Fund (PARNX) has been successful with their ESG strategy for decades.

[Peds]

i dont invest socially. but i do spend/donate my money consciously on items i see bring value. shout out for those last minute planned parenthood donations!

[Neuro-doc]

I stick to broad based indexes.

 

The problem I have with so called socially responsible investing is where to draw the line. We can probably all agree with tobacco companies. What about distillers, brewers, gun manufacturers, cruise missile developers? VW cheated on emission standards. Some banks had phoney accounts to drive growth. Coke and Pepsi make sugar filled drinks. Nike has questionable employment standards in Asia. Do we avoid any firm that does business with a country with a poor record on human rights? Etc, etc. What's left over to invest in?

[ENT Doc]

You do this sort of thing to satisfy an emotional urge, not to beat or keep up with the market. When you pick companies like this you inherently add unnecessary risk and poor track records of returns. Even the PARNX fund previously mentioned has an ER of 0.86 and a turnover of 42%. Think the stated returns manifest in reality? Truth of the matter is, the primary responsibility of a company is to maximize long term shareholder value. This should be as an emotionless decision as it gets. But these kinds of funds, by definition, introduce emotion and subjectivity. Tread lightly.

[Zaphod]

ENT Doc wrote:

You do this sort of thing to satisfy an emotional urge, not to beat or keep up with the market. When you pick companies like this you inherently add unnecessary risk and poor track records of returns. Even the PARNX fund previously mentioned has an ER of 0.86 and a turnover of 42%. Think the stated returns manifest in reality? Truth of the matter is, the primary responsibility of a company is to maximize long term shareholder value. This should be as an emotionless decision as it gets. But these kinds of funds, by definition, introduce emotion and subjectivity. Tread lightly.

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Agree. These are made to be sold and are just something that the packagers know is important to people and they will pay a premium for. In reality, unless you're buying into an IPO or an actual investor, its important to remember what we're actually doing is placing our savings into what we call investments. We're not actually investing in the company directly. We're trading on the secondary market and zero dollars of your index fund go to Exxon or Phillip Morris, they go to whoever the pajama trader you bought or sold it from on the secondary market.

If you want to make these kind of decisions theyre best made in your daily life and actual investments, giving money to companies during growth/seed rounds/IPO. "Investing" in the market is really trading in the secondary market and isnt giving these companies money. Buy these vice stocks guilt free.

[bean1970]

But when Exxon and Phillip Morris (i'm just assuming they are dividend stocks...i didn't check) make profits, those profits are distributed to shareholders via dividends. Those dividends end up back into your account whether you own the individual stock or pooled into the fund dividend. So then it becomes whether you can sleep at night knowing you are reaping the benefits of these dividends.  I guess you can take the dividends as cash (rather than reinvest them) and take that cash and donate it all to charity rather than use the cash for yourself, but then you are kind of defeating the purpose of the growth of your portfolio or at least hindering it by not reinvesting all the dividends, particularly when starting out.

[Zaphod]

bean1970 wrote:

But when Exxon and Phillip Morris (i’m just assuming they are dividend stocks…i didn’t check) make profits, those profits are distributed to shareholders via dividends. Those dividends end up back into your account whether you own the individual stock or pooled into the fund dividend. So then it becomes whether you can sleep at night knowing you are reaping the benefits of these dividends.  I guess you can take the dividends as cash (rather than reinvest them) and take that cash and donate it all to charity rather than use the cash for yourself, but then you are kind of defeating the purpose of the growth of your portfolio or at least hindering it by not reinvesting all the dividends, particularly when starting out.

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Thats only one take. Both of those companies have really high dividends and are basically slaves to their dividends. Many would say its strangling them really. You could look at it as taking the dividend, which is highly tax inefficient and results in a permanent loss of free cash flow to the company as your way of ethically taking money from them and slowly withering them away.

Even if shares were 'reinvested', again, youre not actually providing capital to the company, you're buying free floating stock or from someone else.

I think the whole thing is a bit of a moot point since youre not raising capital anyway, and there is no way to not be involved in some way or another, and everyone is doing something shady somewhere. If you look you can probably find ways to be outraged in so many ways, banks, airlines, cars, etc...I mean is TSLA/Solar city ok, hes basically scamming the tax incentive system. Theres a bit of fraud in every company they say. In the end if things arent economic anyway, no amount of not or investing will hold it up forever.

Dont get me wrong, Im all for being a steward of good things, but in ways I can actually make my own difference. You're not changing anything by buying or not buying a stock. I mean some groups unload hundreds of millions of a name on the market some days and doesnt move the price at all.

[bean1970]

I agree. But some of it is perception.  And why is it then that one has to disclose their stock ownership at a national meeting if it "doesn't matter" and it is by no means affecting the company? owning the stock is not the same as sitting on the board or receiving direct payments, but I've seen stock ownership asked.  How about that your Vanguard Index fund hold X amount of interest? Should your dermatologist own 1 million dollars worth of Allergan?  I don't know. Some of this is just philosophical, right or wrong, rather than financial. just my thoughts.

[Zaphod]

bean1970 wrote:

I agree. But some of it is perception.  And why is it then that one has to disclose their stock ownership at a national meeting if it “doesn’t matter” and it is by no means affecting the company? owning the stock is not the same as sitting on the board or receiving direct payments, but I’ve seen stock ownership asked.  How about that your Vanguard Index fund hold X amount of interest? Should your dermatologist own 1 million dollars worth of Allergan?  I don’t know. Some of this is just philosophical, right or wrong, rather than financial. just my thoughts.

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Oh there can definitely be conflicts of that nature, but those are usually business relationships and payments for something, etc...thats different that the in general idea.

I dont think theres anything wrong say investing in a company you use and believe in and you end up with a materially large position as a result. Thats different than hawking their wares and receiving cheap stock options to get to the same point.

[VagabondMD]

I am going to mildly disagree with some of these sentiments. My investment strategy only slightly overweights the ESG-favorable companies because my conviction in that using my investment dollars has impact is not great. But there is something to it, IMO.

First, the idea that all ESG-oriented funds are expensive is no longer true. There are ESG-favorable index funds at Vanguard and, more recently, at Fidelity that are 20-25 bps, "cheap enough".

Second, the idea that the performance will be underwhelming is not necessarily the case. I mentioned the Parnassus Fund (above), which I have owned in the past, but not currently. I do own the Vanguard FTSE Social Index Fund (VTFSX), which is modestly beating the S&P 500, the most logical benchmark, over the last 1,3,5, and 10 years.

Third, there is the argument that my ESG agenda will be different than person B which will be different that person C and so on. That is true, but if we can all generally agree that companies that have policies that are generally favorable to the environment, social good, and to its employees, as judged by a dispassionate third party, are worth rewarding, we can perhaps set aside our individual agendas.

Fourth, while it is true that we do not buy our shares from the individual company, there is little doubt that buy orders cause share prices to go up, and sell orders cause share prices to go down. That is, if there are more sellers than buyers, prices will naturally drift lower. CEOs and other executives do not like to see their stock prices go down. They are rewarded for higher share prices and punished (often fired) for lower stock prices.

I will agree with WCI that the best, most direct way to punish companies of which you do not approve is to not buy their products or use their services. I loathe the employment practices of Walmart and the horrible "food" that is served up at McDonald's, and, as such, you will not catch me in their establishments. This is an emotional decision. However, if an independent firm using objective criteria finds that they are overall better ESG players than others, I can live with that.

[cgossage]

SRI, ESG, and Impact investing are all on a spectrum. There are strategies you can find out there that are very focused on their mission. Generation is a fund that has had amazing results and really cares about the ESG factors of the companies they invest in. Too bad no one can get into it anymore.

On the other hand, most of these strategies markets themselves as SRI but only remove 1 or 2 positions from their standard portfolio.

If you want to get into SRI it’s important to understand what the fund managers are actually investing in and if that aligns with your personal beliefs.

[Zaphod]

Vagabond MD wrote:

I am going to mildly disagree with some of these sentiments. My investment strategy only slightly overweights the ESG-favorable companies because my conviction in that using my investment dollars has impact is not great. But there is something to it, IMO.

First, the idea that all ESG-oriented funds are expensive is no longer true. There are ESG-favorable index funds at Vanguard and, more recently, at Fidelity that are 20-25 bps, “cheap enough”.

Second, the idea that the performance will be underwhelming is not necessarily the case. I mentioned the Parnassus Fund (above), which I have owned in the past, but not currently. I do own the Vanguard FTSE Social Index Fund (VTFSX), which is modestly beating the S&P 500, the most logical benchmark, over the last 1,3,5, and 10 years.

Third, there is the argument that my ESG agenda will be different than person B which will be different that person C and so on. That is true, but if we can all generally agree that companies that have policies that are generally favorable to the environment, social good, and to its employees, as judged by a dispassionate third party, are worth rewarding, we can perhaps set aside our individual agendas.

Fourth, while it is true that we do not buy our shares from the individual company, there is little doubt that buy orders cause share prices to go up, and sell orders cause share prices to go down. That is, if there are more sellers than buyers, prices will naturally drift lower. CEOs and other executives do not like to see their stock prices go down. They are rewarded for higher share prices and punished (often fired) for lower stock prices.

I will agree with WCI that the best, most direct way to punish companies of which you do not approve is to not buy their products or use their services. I loathe the employment practices of Walmart and the horrible “food” that is served up at McDonald’s, and, as such, you will not catch me in their establishments. This is an emotional decision. However, if an independent firm using objective criteria finds that they are overall better ESG players than others, I can live with that.

Click to expand...

Im not saying anything about performance, thats entirely different. I agree that the best use of resources in this regards is with your wallets everyday. Theres a lot of things I dont like and reflect it in daily life, where it makes a small but meaningful difference. Just saying if some idea takes hold, there will be a lot of people selling the idea, and not necessarily caring about the actual underlying cause. This is true for anything, like bitcoin, exchanges are now in the game not because they believe, but because there is money to be made. So if you want to do it best, it will take a bit more work and is buyer beware like everything. Just because someone purports to invest in a good cause, doesnt make the offering service a good cause.

Part of the reason Im vegetarian has to do with several broader world impacting and lofty goals, not all of course, I just am, its something I can do that lines up with my goals/beliefs/etc...

[Donnie]

How is this even a thing?  Companies don't directly benefit from you buying their shares because all the shares you are buying are on the secondary market rather than from an initial offering.  That means other investors get the money you fork over, not the actual company.

Even indirectly, this strategy will not have a meaningful impact on the share price of companies because value investors will arbitrage any difference between the market value of the company versus its actual value.  If socially responsible investors depress the market value of the stock, value investors will return the market value to its intrinsic value.

If you want to make a difference, make as much money as you can by holding a diversified basket of investments, including in companies you dislike.  You can then make larger donations to causes you believe in.

Cliffs: Socially responsible investing is counterproductive.  Make socially responsible donations instead.

[VagabondMD]

Zaphod wrote:

Vagabond MD wrote:

I am going to mildly disagree with some of these sentiments. My investment strategy only slightly overweights the ESG-favorable companies because my conviction in that using my investment dollars has impact is not great. But there is something to it, IMO.

First, the idea that all ESG-oriented funds are expensive is no longer true. There are ESG-favorable index funds at Vanguard and, more recently, at Fidelity that are 20-25 bps, “cheap enough”.

Second, the idea that the performance will be underwhelming is not necessarily the case. I mentioned the Parnassus Fund (above), which I have owned in the past, but not currently. I do own the Vanguard FTSE Social Index Fund (VTFSX), which is modestly beating the S&P 500, the most logical benchmark, over the last 1,3,5, and 10 years.

Third, there is the argument that my ESG agenda will be different than person B which will be different that person C and so on. That is true, but if we can all generally agree that companies that have policies that are generally favorable to the environment, social good, and to its employees, as judged by a dispassionate third party, are worth rewarding, we can perhaps set aside our individual agendas.

Fourth, while it is true that we do not buy our shares from the individual company, there is little doubt that buy orders cause share prices to go up, and sell orders cause share prices to go down. That is, if there are more sellers than buyers, prices will naturally drift lower. CEOs and other executives do not like to see their stock prices go down. They are rewarded for higher share prices and punished (often fired) for lower stock prices.

I will agree with WCI that the best, most direct way to punish companies of which you do not approve is to not buy their products or use their services. I loathe the employment practices of Walmart and the horrible “food” that is served up at McDonald’s, and, as such, you will not catch me in their establishments. This is an emotional decision. However, if an independent firm using objective criteria finds that they are overall better ESG players than others, I can live with that.

Click to expand…

Im not saying anything about performance, thats entirely different. I agree that the best use of resources in this regards is with your wallets everyday. Theres a lot of things I dont like and reflect it in daily life, where it makes a small but meaningful difference. Just saying if some idea takes hold, there will be a lot of people selling the idea, and not necessarily caring about the actual underlying cause. This is true for anything, like bitcoin, exchanges are now in the game not because they believe, but because there is money to be made. So if you want to do it best, it will take a bit more work and is buyer beware like everything. Just because someone purports to invest in a good cause, doesnt make the offering service a good cause.

Part of the reason Im vegetarian has to do with several broader world impacting and lofty goals, not all of course, I just am, its something I can do that lines up with my goals/beliefs/etc…

Click to expand...

Also vegetarian, for 22+ years, also for a myriad of reasons including animal welfare. That said, I do not disparage carnivores, which leads to...

Donnie wrote:

How is this even a thing?  Companies don’t directly benefit from you buying their shares because all the shares you are buying are on the secondary market rather than from an initial offering.  That means other investors get the money you fork over, not the actual company.

Even indirectly, this strategy will not have a meaningful impact on the share price of companies because value investors will arbitrage any difference between the market value of the company versus its actual value.  If socially responsible investors depress the market value of the stock, value investors will return the market value to its intrinsic value.

If you want to make a difference, make as much money as you can by holding a diversified basket of investments, including in companies you dislike.  You can then make larger donations to causes you believe in.

Cliffs: Socially responsible investing is dumb.  Make socially responsible donations instead.

Click to expand...

If it is dumb to modestly overweight the good guys and underweight the bad guys, then dumb I am, and you can put that on my tombstone.

I disagree with the arbitrage argument as an absolute (MO has always traded at a discount to the market, albeit for a variety of reasons), and I also believe that companies that are stewards of the environment, contributors to their communities, and take good care of their employees will naturally fare better over time. People will want to do business with them, their communities will return the favor, and their employees will be more loyal and productive. Maybe I am naive, and perhaps I will be proven wrong, but it's my money, and I can spend/invest it as I please.