Good Honest Dollar $$

In last Friday’s post, I outlined the benefits of Socially Responsible Investing (SRI) from the viewpoint of broader society.

If managed effectively, SRI helps produce positive social outcomes by helping to direct financial capital toward companies and industries whose impact on society is positive, and providing an incentive for corporations and industries to adopt positive ethical practices.

Nevertheless, the concept has its share of critics, and whilst I believe that Socially Responsible Investment should be encouraged, objections to the concept are worthy of examination.

Broadly speaking, critics of SRI generally fall into three broad categories:

• Those who are opposed to the concept on principle;
• Those who believe that SRI compromises investment performance;  and
• Those who do not believe that SRI is an effective mechanism to produce positive social outcomes.

In today’s post, I would like to discuss the first category. The second and third categories will be discussed in the following two posts in this series.

 
Arguments against Socially Repsonsible Investment based on principle

Objections to SRI based on principle can be further sub-divided into three additional categories:

• SRI inhibits the effectiveness of financial markets in allocating capital;
• Socially responsible investors are anti-business; and
• SRI represents a form of selling out to capitalism.

Each category is discussed in turn below.

 
Inhibiting the effectiveness of financial markets

The first main objection to SRI on principle is that it inhibits the effectiveness of financial markets in allocating capital in an efficient manner.

According to this argument, capital should be allocated solely on the basis of producing the maximum return on investment (ROI). This, in turn, is determined by consumer and business demand for products and services, as well as the cost of producing such products.

Accordingly, allocation of capital based solely upon maximimum ROI is the most effective mechanism by which capital is allocated toward sectors in which it can be most productively employed. Where ethical considerations interfere with this process, the result may be that capital is redirected towards sectors where it cannot be employed to its maximum effectiveness.

Whilst I cannot dispute the importance of allocating capital toward its most productive use, I cannot agree with this argument.

Firstly, the market allocates capital according to consumer demand and the cost of meeting such demand, but this may not reflect the services which are most needed in terms of broader society. There is considerable demand for products such as weapons manufacturing or pornography, but should capital really be allocated to such areas?

Moreover, the majority of ethical investors seek competitive financial returns as well as ethical considerations. These investors will only allocate capital toward areas where it can be employed productively to produce products and services for which a substantial level of demand exists and where such demand can be satisfied in a cost effective manner.

 
Socially Responsible Investors are anti-business

I have little empathy for this viewpoint, under which socially responsible investors are seen to want to use their investments to push their own social agendas, sometimes with little or no care about the nature of business or the need for the business to earn competitive returns for shareholders.

It may be true that some investors have certain agendas which are not compatible with the business objectives of the investee company. However, this is simply not the case for the majority of investors.

The majority of socially responsible investors seek a competitive rate of return on their investment whilst investing in a socially responsible manner. Those who participate in shareholder activism usually seek to do so in a constructive fashion to achieve workable outcomes.

 
A sell out to capitalism

On the flip side of the coin are those who see SRI as a form of selling out to capitalism, which they see as an unfair and unjust economic system.

Again, I do not have much empathy for this argument. Whilst capitalism is not perfect, it is here to stay in most western countries. For better or for worse, the system will not change anytime soon, and attempting to change the capitalist system, or simply wishing it would change, is not the most effective approach toward achieving social outcomes.

Rather than try to change the capitalist system, it is more effective to work within the system to produce fair and equitable outcomes.

Working within the system is more effective than fighting against it, and in addition to ethical consumerism, SRI represents a mechanism for individuals to work within the capitalist system to encourage ethical and responsible behavior.