Why I’m delaying but not discounting social impact investing

When I started getting interested in investing I felt pretty certain I’d be doing the right thing and choosing the most ethical option I could find.

I was browsing options online and the choice seemed to be narrowing down to a few funds that sit in the Socially Responsible Investing (SRI) bracket.

But in the end I opted for a plain global tracker fund.

That’s because, at the moment (I’m hoping to be persuaded), I don’t think I would do very much good by investing in a SRI option.

These funds work by excluding harmful companies.

Given that most investors are making their decisions based on pure financial returns, I was pretty certain that by avoiding investing in these companies my money would only be replaced by ‘neutral’ investors.

That’s because these investments still look good on paper, so my decision not to invest would only make the smallest and short termest of differences. It would be ‘corrected’ by the market.

When might it make sense to go socially responsible?

If these ordinary investors who are only rationally interested in financial returns are the vast majority, which I think they probably are, then even actively investing in ethical companies that look like a good return on paper might be quite pointless.

What I’m trying to do here is make a difference to society. But if an investment looks good on paper then the ordinary investors will put money into it if it’s ethical, just the same as they will if it’s unethical.

So by investing in one of these companies the only difference I’m making is displacing an ordinary investor.

That logic suggests that I can make the biggest difference by supporting the riskiest ethical investments that ordinary investors wouldn’t go for. They don’t look good on paper, meaning I’m very unlikely to be displacing a value neutral investor, hence my investment makes more of a difference.

Of course, riskier options have a bigger job to really convince me that their social return on investment is worth it; the higher risk of loss means the total value of my investment is lower than it would be otherwise.

Their direct competitor here isn’t other companies, it’s the not-for-profit sector.

There are some pretty amazing charities out there, and the ones promoted on sites like GiveWell have had their effectiveness investigated very rigorously.

Considerably more rigorously than pretty much any socially responsible startup.

I need to be certain that the world wouldn’t have been better off if I’d gone ahead and invested at a higher financial rate of return and simply donated a substantial portion of that to those charities.

That leaves me with one last best guess on the best way to invest money ethically.

That would be to invest in socially responsible companies that would have the edge over these very effective charities.

I think we massively over-estimate the value that private enterprise brings to our lives, but one area they clearly have the edge on is in technology.

I doubt that even the most effective charities are able to leverage the funds and skills that a private company can when it comes to technological development.

I also think there’s pretty good reason to believe that climate change is the number one ‘worthy’ issue. I won’t go into reasons now, but substitute this for your own choice if you like.

So on the impact investing front, the only conclusion I’ve been able to come to is that I should go for higher risk investments in the green technology area.

In particular, to be justified, these would need to be for developing technologies that I think are more likely to be neglected by government or voluntary support of other kinds.

Right now I have no idea what this niche is, so I’m delaying making an investment but not completely discounting it!

A final thought.

I do think there’s probably a good due diligence reason to divest away from harmful companies – we just shouldn’t kid ourselves that this is for ethical reasons.

The really big divestments I’ve heard about recently – the Norwegian state pension fund and the British Nest pension fund – gave their explicit reason for doing so as being the unfavourable long-term future of the fossil fuel and tobacco industries.

Due to a combination of increasing regulation and concern globally, and the development of alternative technologies, these sectors are losing their value as a long term investment bet.

It might be then that our time and money is best spent on campaigning for more regulation and political change.

This would help to create the conditions that will lead the values neutral investors to divest from harmful companies, and compel governments to support the policy and technology solutions we need to make a better world.

In summary:

• Diligence: Invest in socially responsible industries for the long haul where they appear to be a good bet, just like those major pension funds are doing
• Take risks to invest where private enterprise might have the edge in making a difference e.g. green tech
• Put my biggest focus on the things that make a difference, which seems to be campaigning and supporting the best charities