Thud: Socially Responsible Investing Meets Reality

The goal of business is to make money.

Plain and simple.

Or so I thought…

According to the latest data, money is spilling into sustainable investments.

Chalk it up to America’s newly evolving “outrage” culture that now pervades our lives.

The last two years have witnessed investors push more than $2 trillion into socially responsible funds.

To these folks — and their trillions’ worth of capital — businesses should value certain social criteria above making money.

What if a business fails in this regard? Then it isn’t worthy of investment.

That’s how the socially responsible investor thinks!

But I’ll furnish hard proof today that socially responsible investors — among the fastest-growing demographics on the planet — are playing a fool’s game.

Spoiler Alert: CNBC characterized it best — “If you want to feel good about the stocks you’re holding, you’ll pay the price in lower performance.”

It’s Anything but “Smart Money”

In the early 1970s, with the war raging in Vietnam, protesters found it deplorable that companies like Dow Chemical (the maker of napalm) were actually profiting from the war.

The controversy gave rise to the world’s first socially responsible investing (SRI) fund — the Pax World Fund.

Fast-forward nearly 50 years and SRI funds are enjoying their salad days.

According to the latest data from the Forum for Sustainable and Responsible Investment…

More than one out of every five dollars under professional management in the United States — roughly $8 trillion — is invested alongside socially responsible mandates.

But don’t be fooled by the increasing popularity or large capital inflows.

Considerable research demonstrates this is anything but “smart money.”

As Nobel Prize winner Milton Friedman put it in 1962:

“There’s one and only one social responsibility of business — to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.”

While I don’t think it’s bad for businesses to improve society, as Milton Friedman points out by no means is it a requirement.

Instead, it’s more of a self-policing system like Adam Smith imagined it in The Wealth of Nations:

“By pursuing his own interest [an individual] frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good.”

Let’s be clear on this…

Social responsibility is largely a byproduct of conducting good business.

Good businesses sustain, and their stock prices expand.

Bad businesses cut corners, and they ultimately fade into irrelevance.

Therefore, buying solely on the merits of socially responsibility needn’t be a motivating force.

Nonetheless, the behavior persists.

I suspect it’s a way for people to give their wealth-building pursuit more meaning.

But what few investors realize is that their noble endeavors to enforce social responsibility fail on several fronts…

Alcohol, Tobacco and Firearms to the Rescue?

If social responsibility is to be a primary goal for businesses, there should be some way to measure it.

Yet aside from a few very subjective surveys, there isn’t one.

That’s why you’ll never see an analyst write: “Shares of Starbucks are worth at least $15 more because of the company’s commitment to improving water quality in impoverished nations.”

Put simply, social responsibility might be admirable — but that’s it.

Publicly listed companies will never be able to elevate socially responsible goals above growth.

To be frank…

The moment companies list shares publicly and the dough starts rolling in…

Their singular obligation is to increase shareholder value. Period.

That’s why shareholder value is so easily measurable in terms of profits and share prices.

Like I said, we invest in companies to make money, not to save the world.

Before I sign off, I’ll give you the bottom line on the performance of SRI funds.

If you’re an active contributor to America’s outrage culture, you may want to stop reading now.

CNBC recently “reviewed years of Morningstar data on the performance of socially responsible funds versus traditional funds and benchmarks.”

They found that any funds designed to exclude “sin” stocks — that is, tobacco, alcohol and guns — dramatically lagged in performance.


Ahead of the tape,

Louis Basenese
Chief Investment Strategist, Wall Street Daily

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