There’s probably a decent chance this post will make you angry. Feel free to skip it if you want to stay in a good mood. If you decide to read it anyway and are looking for ways to vent your anger, insulting the author (Mr. Cheap) or announcing that you’ve unsubscribed to our feed are both popular options :-).
Some time ago Larry MacDonald wrote an interesting article on socially responsible investing for The Globe and Mail. For those unfamiliar with the term, SRI is a mutual fund which only buys stock of companies that meet the ethical criteria of the fund. As an example, almost no SRI would ever buy Rothmans or British American Tobacco stock, since they wouldn’t want to profit from tobacco sales.
What was most interesting about the article, is that Mr. MacDonald points out that SRI funds have performed as well as general funds. The explanation for this is that ethical companies are less likely to be involved in a lawsuit or to have a business affecting PR nightmare if their unethical practices come to light.
I owned Rothmans stock and have actually suffered from ownership on two occasions. I was briefly corresponding with a reasonably famous investor and after I admitted that I owned Rothmans stock he stopped corresponding with me. Another time a reader (who was clearly crushing on me) and I exchanged a few e-mails, and after it came up that I unabashedly own tobacco stock she told me off and stopped writing as well.
I always wonder about social beliefs that the main argument for them is people who say “believe what I believe or I won’t be your friend”. I have friends who are pro-choice and pro-life, chums who are pro and anti gun control, religious (from numerous faiths) and atheist pals, I have socialist buddies and capitalist buddies. I have my own firm opinion on each of these issues, but it has never prevented me from enjoying the company of someone who has another point of view.
SRI are fine for what they are, but I somewhat disagree with the underlying philosophy. To use my Rothmans stock as an example, not a single additional cigarette was sold because I’m the owner of part of the company. If I had sold my Rothmans stock to Mike, the company would continue to function in EXACTLY the same way it had before the sale. The only difference is that Mike would be collecting the quarterly dividend instead of me (and he would be able to vote on shareholder issues instead of me). I was one owner of a well run, very profitable Canadian company that makes money selling legal products to people who want to enjoy them. I would have been delighted to continue owning it if the sale hadn’t been forced, and I’ve considered buying Altria on a number of occasions.
Say now, someone objects to ownership (fair enough). They sell their Rothmans stock, because even though they aren’t materially affecting the operation of the tobacco company, they don’t want to profit from the supposed suffering it causes. They can’t own most mutual funds (which might buy Rothmans or another unethical company at any moment), or index funds (which will almost certainly own unethical stocks).
If we object to being a shareholder in these companies, which doesn’t affect their day-to-day operation, we certainly can’t be CUSTOMERS: which DOES affect their day-to-day operation. If I buy Rothmans smokes, the company has more money to spend on advertising, improving their operations and other business activities (such as paying those nasty dividends to shareholders which I’m opposed to). I also can’t sell Rothmans smokes, or patronize companies that do (for the same reasons I can’t buy their product).
At this point I’ve isolated myself from pretty big part of the economy (convenience stores, most grocery stores, etc). Certainly if I can get enough fellow consumers to join me, we’ll be pressuring stores not to do business with Rothmans, and hurt their business. Alternatively I could lobby the government to make smoking illegal and criminalize people who choose to smoke and the companies that try to sell to them. If I’m not doing either of these things (and just not buying sin stocks myself), I’m not really accomplishing anything except letting others collect the profits from these companies (and if enough people refuse to buy them, it WILL drive profits up for the remaining buyers).
To focus on a specific example, tobacco companies, I can understand why people are against smoking: it kills people. If someone asked my opinion whether they should start (or continue) smoking, my advice in EVERY case would be “don’t smoke”. HOWEVER (and this is my personal politics creeping in), if an adult CHOOSES to smoke, with full awareness of the consequences, who am I to try to force them to stop? Should I try to stop obese people from eating junk food? Should I try to stop skiers from skiing (and other sports with a danger component)? Should I try to force people to stop drinking (and stop myself)? Putting aside the “addictions” argument, people engaging in “harmful” activities have weighed the possible consequences and made decisions for themselves. Without knowing everything about them, how could I possibly make a better decision for them then they could for themselves?
Some people bring up the health care costs, and how people engaging in self-harm drive up costs in taxes or health-insurance premiums. Again, look at the examples in the previous paragraph. Are we really ready to ban everything that’s harmful?
I have no problem investing in a company that I wouldn’t shop at (I *HATE* BMO as a customer, and it’s one of my main holdings). Given this, if a company does a good job delivering a legal product, why should I avoid investing in it? Not that it’s at all relevant to this post, but I don’t personally smoke cigarettes (I occasionally share a hookah with friends, and VERY occasionally enjoy a cigar).
Do you invest in “sin stocks” or do you try to follow a SRI approach?