by Ron Ross
Mutual fund managers invest in stocks with the primary objective of making money for their shareholders. Some funds have the additional objective of making "socially conscious" investments, but meeting that goal is far more challenging than you might think.
It's hard to argue with the stated objectives of socially conscious funds. One fund, for example, "examines a company's treatment of the environment, its occupational health and safety, and hiring practices" before investing in it. This fund also avoids tobacco companies.
Another fund "invests in companies that respect human rights, play a positive role in local communities, and produce useful products in an environmentally sound way." It also stays away from companies engaged in nuclear energy or weapons manufacture.
But as these funds attempt to categorize companies as good or evil, they quickly run into a problem of oversimplification.
Large corporations have complex and diverse impacts on society. Any particular company interacts with thousands of customers, employees and suppliers. Most of these people would say that the company has a positive impact on them.
How can I make that assumption? Our economy is based on voluntary exchange. No company can force customers to buy from it, or demand that workers work for it or insist that suppliers sell it supplies.
Any particular company has both positive and negative effects on society. Who is to say whether the total effects are on balance positive or negative?
The very fact that a company makes a profit is a sign that it is making a contribution to society. A profit indicates that the value of a company's output is more than the cost of the inputs -- labor, raw materials, rent, supplies. Profit is a reliable measure of a company's overall efficiency.
An even more basic question that advocates of socially conscious investing must answer is this: Is voting with your investment dollars an effective way to alleviate the ills of society? If you don't buy Philip Morris stock, will it have any impact on the company? Will fewer people smoke as a result of your investment decision?
A company only receives money from the sale of its stock when the stock is first issued. Unless your mutual fund is buying the stock at the initial offering, your money is going to another investor, not the company itself. Avoiding purchase might make you feel good, but beyond that it would be difficult to detect any result.
You might say that even though being socially conscious has no discernible effect on companies' behavior, you simply do not want to be associated with a company that makes, for example, cigarettes. But the complexity of today's corporate ownership structures makes it hard to avoid dealing with the cigarette makers.
Philip Morris Corp., for example, will receive your shopping dollars if you happen to buy Post Toasties cereal, Oscar Mayer wieners or Miller beer. Phillip Morris owns the companies that make those and many other products. R. J. Reynolds tobacco is now RJR Nabisco, which markets a vast array of common products.
Suppose you decide you want to avoid utility companies with nuclear power plants. You can steer clear of their stock easily enough, but how would you screen out all the companies that buy their electricity from such utilities?
Our economy is too intertwined, relationships are too multilateral to avoid particular kinds of connections. Remaining pure in a complex world isn't a realistic option unless you're willing to drop out of society and become a hermit.
It's conceivable that socially screening investments results in a positive benefit of some kind. Nevertheless, if your objective is creating some kind of positive benefit for society, there are other more efficient ways of doing so.
We all have a limited amount of energy and attention we can apply to various objectives. What you spend pursuing good in one way is not available to pursue good in another way. Giving your time and money directly to your favorite causes is far more effective. There's not much question that an investment of your time and effort in local good works will have an impact.
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