Saturday, April 11, 2015

How Ethical Can An Investor Be?

Ethics as it relates to investing isn’t something I’ve addressed before. And this is really due to the fact that what qualifies as an ethical investment to me may be far different than what’s ethical to someone else.
Nonetheless, I thought it’d be useful and interesting to address the subject once and for all and give my take on it. Keep in mind that what you read is just my opinion. Ultimately, you have to invest as you feel fit. No amount of money is worth being uncomfortable, in my opinion. If you can’t sleep at night, you’re doing it wrong. Like I often say, personal finance is personal for a reason. As such, make sure you’re doing what makes sense foryou.

The Giant Gray Area

Ethical investing exists in a huge gray area. There really isn’t anything black and white here. Not only is a company’s ethical position subjective, but it’s just not possible for any individual investor to know every iota about a company and what it’s doing behind closed doors.
Furthermore, I believe it’s possible for anyone to find something unethical about every company in existence if they were to dig deep enough.
Now, I admit there’s a spectrum there – where you have more ethical on one side and less ethical on the other. But to think that any company exists completely on one side or the other, where it’s absolutely and completely unethical or ethical, is just plain silly, in my view. And that’s why all companies operate in a gray area, to varying degrees.
Now, one could make the case that, say, Philip Morris International Inc. (PM) is a less ethical choice than, say, General Electric Company (GE). Philip Morris may fall on the other side of the spectrum in comparison to GE. But how much more so? We all know that tobacco products are harmful, but what about GE’s poor historical record with pollution and their role in subprime lending during the financial crisis? And those who claim that PM has no redeeming qualities whatsoever must forget that they employ 82,000 people around the world and contributed more than $39 million to various charities in 2013.
Again, what one person finds ethical is really subjective and individualistic. However, it’s important to remember that your opinion isn’t any more important than anyone else’s. As such, your personal ethics aren’t necessarily any more “right” than anyone else’s.

Is It Possible To Ethically Invest?

The big problem with introducing a hefty dose of ethics when it comes to investing is that it’s almost impossible to succeed.
The first problem is that it’s impossible, in my view, to pick any company out there that’s 100% ethical 100% of the time. Like I mentioned, there’s a spectrum that exists in a large gray area, but I find it unfeasible to find any company that exists in a black-and-white manner and all the way on one side of the spectrum.
You could certainly come up with a list of stocks you feel comfortable with and invest only in that particular subset of stocks, but how much are you limiting yourself? Is investing not capitalistic? Is the point not to benefit oneself financially? How much should ethics cost you? Furthermore, if you own any type of index or mutual fund at all – highly likely if you contribute to a defined contribution plan through your place of employment – the odds are quite high that you own companies that you might not feel totally comfortable with anyway. It may prove difficult if not impossible to avoid companies that you may not completely agree with in all manners as it relates to ethics.

What About The Rest Of Your Life?

I often find it strange that ethics come up when certain stocks (defense, oil, and tobacco stocks seem to be particularly popular) are discussed, as if it’s this temporary period where people feel obliged to jump on a self-righteous soapbox to spew ethics.
But where are these people and their ethics the other 99% of the time? I often hear about how unethical it is to invest in Big Oil because of the environmental damage, but are these same people driving around in cars powered by bubble gum and rainbows? What about the clothing we’re all wearing? Who made the clothing and what were the working conditions? We’ve all heard about the “smartphone sweatshops”, yet I don’t see any people any less glued to their devices. It seems easy to lambaste a company or an investor for their supposed lack of ethical behavior, yet quite difficult to actually live one’s life in a manner that avoids products, services, and people of questionable ethics.
Be careful not to be blind to the world around you. If you really want to invoke ethics, at least be consistent. Unfortunately, however, I think you’ll find that if you decide to adopt such a consistent policy of not buying, investing, or supporting anything or anyone that isn’t completely ethical 100% of the time (or at least arguably substantially ethical most of the time), you’ll end up looking for a new planet to inhabit.


Personal finance is personal. As such, you should only invest where you feel comfortable.
However, I implore you to really be mindful and consistent when it comes to ethics. If you truly want to be a successful investor, be careful not to paint yourself into a corner with only a small handful of available companies to invest in that may not even be as ethical as you think.
In addition, be careful about insisting that other people adopt your ethics, because while you have every right to your opinion on a matter, so does everyone else. And ethical behavior really is subjective, as I think anyone could make a case as to why any company is ethical or unethical, depending on their stance and belief system. Doesn’t make anyone right or wrong. I’ve never come across any company that was 100% evil; likewise, I’ve never run across any company that was 100% altruistic. At least, not from where I’m standing.
As one last point, make sure you do your due diligence into a company’s behavior if ethical investing is important to you. I think you’ll find a lot more than just assumptions based on headlines, and you may or may not like what you find.
Full Disclosure: Long PM and GE.
What do you think? Is ethical investing possible? 

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