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Saturday, March 30, 2019

Ethical Investing - The pitfalls

I was recently talking to a friend about investments and the subject of "Ethical" investing came up.
It's the idea of that investor who feels good with himself by not investing in companies whose practices go against his moral/ethical principles.

It sounds interesting....initially. Then you start to realize that depending on how completely "ethical" you want to be, you are quickly limited with your choices. Let's look at a few examples:

Tobacco Companies - Many consider it immoral to invest in smoking related products, as they increase the likelihood of people getting cancer.

Coca Cola, Pepsi: Due to how the consumption of soda increases obesity and diabetes rates. This obviously would include other soft-drink companies, but if you want to go further, why not also food producers? that do not strictly produce organic foods?

Energy companies: Well, Fossil Fuels. Pollution, damage to the environment, etc

Defense Companies: Oh, I'm against weapons and I'm ethically against the growth of the Military Industrial complex.

Pharmaceuticals: because it is unethical to charge outrageous prices and indirectly deny health care to people by pricing them out. In a tightly related trend: Opposition to health insurers, because well "they are abusive" bastards too.

Or why invest in Apple when it has been reported to exploit Chinese workers in factories in China for super low wages? Ditto for Walmart, or anyone who doesn't pay a "fair" wage.

Or why invest in any company that legally reduces its tax liability to zero or near zero, or moves its head quarters overseas to a lower tax jurisdiction?

But we can keep going:

Alcohol companies: Domestic violence, broken families, traffic accidents and so on

Marijuana companies: because well, I think Marijuana should be illegal. Funny that what is legal today may not be tomorrow. Who is the superior human with the magic wand to decide what's right and what's wrong? In the 20's drinking alcohol was illegal too.

Banks: Because of their history of nickle and diming clients (Wells Fargo's sues in 2018 anyone?), or their reckless and predatory lending practices that plunge the economy from time to time.

Are you also going to avoid investing in indexes or ETFs because they happen to include one company with which you don't totally agree in a moral dimension?

Changing behaviors, changing laws, changing scientific opinions. All those will be affecting your take on what is being done right or wrong over the years.

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So, my personal problem with "Ethical Investing" is that it limits you considerably if you truly want to apply it. This damages your portfolio diversification across companies and sectors. And let's face it:  even if you were to only invest in "ethical" companies, there is no guarantee that at one point they can do something you don't like. They can even be cooking their accounting books as we speak or hiding all sorts of skeletons in their closets.

In the end, all the businesses in this world are handled by humans. As humans, we are greedy and full of flaws. No business/company is going to be perfect. If you want to follow an ethical investing approach, by all means. Personal finance is "Personal" for a reason. But regardless of whether it is possible to have good long term performance or not, it is a road where you will be severely limited in your choices and where you should also be prepared for constant ethical and moral disappointments over the years.

LT


Further reading:
https://www.marketwatch.com/story/the-big-snag-in-ethical-investing-2017-09-14
https://www.wealthsimple.com/en-us/learn/what-is-ethical-investing


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