Institutional Investors

Socially Irresponsible Investing

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Institutional Investors

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Socially responsible investing. Awesome! What’s not to love – your capital doesn’t just enrich your life, it also flows only to companies that do social good. Hopefully, if enough people did this, companies that harm society would face higher capital costs as they received less capital, and they’d die out. The best features of capitalism and socialism wrapped into one nice tidy package.

This sounds great, just as socialism was music to Russian ears a hundred years ago. Nobody goes hungry and everybody is happy. I lived under socialism, and both of my able, highly educated, and fully employed parents struggled to find food on a regular basis for our family. Surprisingly, my childhood was still happy, but that has to do with the love unconditionally given by my parents, not socialism.

Socially responsible investing on an institutional level, where one body makes “socially responsible” capital allocation decisions for a pool of investors, is a utopian concept, just like socialism.

It is simply impractical.

Why? Let’s look at a few examples. We all can agree that tobacco, alcohol, oil, guns, defense, abortions, child labor and pawn shops are bad. Right?

Tobacco? Smoking is bad for you. I don’t want my kids to smoke. I quit smoking myself 20 years ago – the hardest thing I ever did. Some will argue that because tobacco is a legal product – just like alcohol and even marijuana in a handful of states – and it’s okay. Do people have the right to consume things that give them pleasure even if they are bad for them? You bet they do. But okay, responsible investors, I’ll let you shun this one, at least for now.

Guns. Half of your investment pool will be for banning guns and the other half will adamantly recite the Constitution’s given second amendment. Let’s throw abortion into this pot, too. Just watch presidential debates and you’ll see that just as with guns, the country is hugely divided on abortion. Which half is your socially responsible fund is trying to please, those who defend the Constitution and individual rights, or those who would keep people from hurting themselves?

Big oil. Oil and especially big oil is hated. Global warming is bad, thus big oil is bad. Except that the internal combustion engine has brought billions of people out of poverty and has been responsible for tremendous improvements in the quality of life globally. A third of the U.S. workforce still labored farms at the opening of the 20th century; now, largely thanks to oil (gasoline), only 3% of the employed population works in agriculture. Don’t want big oil get your capital? Less capital means higher oil prices, and thus people on food stamps will have less money left for groceries. Just be aware of this.

Green energy is great! No pollution or global warming. This must be socially responsible investing. Well, except if you love birds and don’t want them to be massacred by windmills.

Defense companies. Would America and the world be better off if the U.S. spent 1% of GDP instead of 3% on defense? Is our defense industry really an offense industry? I’ll let you ponder and debate these points. But I hope you see the arguments for both sides and that most people will disagree on this topic.

Pawn shops. This one is my favorite. I love it when rich, privileged people feel bad for poor people and are outraged that pawnshops charge 200% interest a year. They try to run pawnshops out of business and in doing so hurt the people they were so compassionately trying to help.

Read the full article here by Vitaliy Katsenelson, , Advisor Perspectives


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