By Meir Statman, author of What Investors Really Want: Discover What Drives Investor Behavior and Make Better Financial Decisions
All investors care about wealth, but many also care about values. Indeed, I was drawn into studying socially responsible investors years ago because they defy the premise that investors care only about wealth. I have met socially responsible investors at conferences, such as SRI in the Rockies. They are passionate serious investors, eager to profess their values to fellow investors and as comfortable with one another as old friends.Investments provide three kinds of benefits, utilitarian, expressive, and emotional. Utilitarian benefits are the answer to the question, What does it do for me and my pocketbook? The utilitarian benefits of watches include time telling, the utilitarian benefits of restaurants include nutritious calories, and the utilitarian benefits of investments are mostly wealth, enhanced by high investment returns.
Expressive benefits convey to us and to others our values, tastes, and status. They answer the question, \’What does it say about me to others and to me?\’ Private banking expresses status and esteem. One private bank advertised its services along with a chauffeured vintage Rolls-Royce and the tag line “Once you\’ve earned exclusive service, there\’s no turning back.”
A stock picker says, “I am smart, able to pick winning stocks.” An options trader says, “I\’m sophisticated, willing to take risk and knowing how to control it.”
Emotional benefits are the answer to the question, How does it make me feel? The best tables at prestigious restaurants make us feel proud, insurance policies make us feel safe, lottery tickets and speculative stocks give us hope, and stock trading is exciting. Gerald Tsai, Jr. was a fund manager who pioneered the go-go performance funds in the 1960s. “He loved doing transactions,” said Christopher Tsai, recalling his father\’s enthusiasm about the stock market. “He loved the excitement of it.”
Investment professionals are often uncomfortable with the commingling of utilitarian, expressive, and emotional benefits. Many financial advisors are puzzled by the desire of some investors to exclude from their portfolios stocks of tobacco companies. Why not invest in stocks of tobacco companies if they produce the highest returns and then use these returns for antismoking campaigns? As Rob Moody, a financial advisor at Compass Advisors in Atlanta said, “Those investors who are interested in social or ethical investing would be ahead if they invested in anything else, including “unethical” companies, and then donate their profits to the charities of their choice.”
Moody\’s suggestion makes as much sense to socially responsible investors as a suggestion to Orthodox Jews that they forgo kosher beef for cheaper and perhaps tastier pork and donate the savings to their synagogues. A member of the Church of the Brethren said, “I occasionally see articles by investment columnists on the sin funds that invest primarily in tobacco and alcohol, etc., advising people to take their profits from these funds and do good with them. That argument seems completely backwards to me, because the money is already out there supporting bad things.”
Advising socially responsible investors to separate their values from their money is symptomatic of a more general tendency among investment professionals to separate the utilitarian benefits of investments from their expressive and emotional benefits. Reathel Geary, a financial advisor with IMHO Investments understands that the benefits of socially responsible investments extend beyond utilitarian returns. He said: “We like to call it “opinionated investing”—helping our clients to invest in firms that share their views on what\’s important.”
Some social responsibility communities express a single value, such as protection of the environment, while others express several values, such as avoidance of tobacco, alcohol, and gambling. The differing values are reflected in the many alternatives to the term “socially responsible investing,” including environmental, societal, and governance (ESG) investing, sustainable investing, green investing, ethical investing, mission-based investing, values-based investing, and religion-based investing.
The Range of Values
I have learned the wide range of utilitarian, expressive, and emotional benefits of socially responsible investments in interviews with many socially responsible investors. Respect for employees matters most to a video producer. “I don\’t like big-box stores very much, but when I happen to be in one, I tune to its general vibe. If employees are unhappy, there\’s a reason for it…I am appalled by incredibly high CEO salaries, and the increasing gap between rich and poor in the United States. People need a living wage, they need health insurance—all of that is important to me.”
An owner of military-related companies distinguishes between the products of companies and their behavior. The type of company, he said, whether military, tobacco, or gambling, has nothing to do with holding the board and the leadership of a company accountable for socially responsible behavior. “Being a good corporate citizen also includes the way companies treat community issues and the environment and support the communities where they reside, not just by hiring the people but by contributing to community causes.”
Investors in socially responsible stocks are drawn to their benefits by families, religions, books, and life experiences. “Although I was raised secularly for the most part,” said an education consultant, “my core values come from my family\’s religious tradition, that is, that Jewish people believe in social justice. My grandfather emigrated from Eastern Europe when he was 14. He was one of the founders of a major union local and then went on to start his own business. When I was a teenager, I was doing some work for him when there was a strike at his business, and he told me I couldn\’t cross the picket lines. My mother said, \’You have to go to work and help him,\’ but my grandfather said, \’You can\’t do that.\’ Those are the experiences and the key framework that led me to emphasize feminist and workers\’ rights in my investing.”
Socially responsible investors regularly express their social responsibility in donations of money and time to community and volunteer work, promotion of socially responsible resolutions at shareholder meetings, and direct investments in projects such as housing for low-income people. These provide consistency between the utilitarian benefits of investments and their expressive and emotional benefits. “The church is involved in community work and volunteerism, much beyond investment,” said the member of the Church of the Brethren. “We have active programs under way in several countries, including the Dominican Republic, Brazil, and India, where we work directly on issues such as education, social justice, and community health.”
We Want to Do Good. We Also Want to do Well.
Socially responsible investors care about the expressive and emotional benefits of their investments, but most care about utilitarian benefits as well. You know,” said to me one financial advisor, “socially responsible investors will retire someday and they too will need income in retirement.” The member of the Church of the Brethren said: “People from the church ask us fairly regularly whether we give up anything in terms of returns by narrowing the focus of our portfolio through [social responsibility] screens… Often it\’s phrased just that bluntly: “How much does it cost me to invest with you and exclude those things from my portfolio?”
The reality of the trade-off between returns and social responsibility was also conveyed to me by the video producer who said, “My husband and I became involved in socially responsible investing early on. . . . We didn\’t have enough money then to have a portfolio manager. So we bought socially responsible mutual funds, which actually performed very badly at that point, and we ended up leaving them… [Afterward], we bought plain… funds and looked the other way. However, we didn\’t feel comfortable investing that way; I didn\’t even want to look at how those funds were invested. So we always kept an eye toward returning to socially responsible investing. Then, as the result of an accident… I received a large settlement. The minute I was in a position to hire an investment manager, I said, \’Let\’s invest in a socially responsible way… I consider it a luxury that I now have the ability to invest more in line with my values.\'”
Providers of socially responsible portfolios understand that socially responsible investors care about all the benefits of their investments, utilitarian, expressive, and emotional. Calvert presented in an advertisement a photograph of an investor saying, “Truth be told, I\’m as financially ambitious as I am socially conscious.” Calvert\’s advertisement went on to say: “We hear you. You want to do good. You also want to do well. That\’s why we manage Calvert mutual funds with Double Diligence. It\’s our disciplined process for finding stocks with strong growth potential and avoiding those at risk from unethical business practices. So you can invest for your goals without compromising your values.”
In “The Wages of Social Responsibility,” a study that won a Moskowitz Prize, I found that stocks of companies that rank high on social responsibility criteria such as employee and community relations earn returns higher than stocks of companies that rank low. This indicates that investors in stocks of companies ranked high on employee and community relations enjoy not only the expressive and emotional benefits of investing in the stocks of such companies but also the utilitarian benefits of high returns. Yet stocks of companies associated with activities regularly shunned by socially responsible investors also provided higher returns than stocks of other companies. Shunned companies include those associated with tobacco, alcohol, gambling, firearms, military, and nuclear operations. This indicates that socially responsible investors sacrifice utilitarian returns for the expressive and emotional benefits of excluding the stocks of tobacco companies and those of other shunned companies.
Socially responsible investors who invest by the “best-in-class” method can enjoy high utilitarian returns along with high expressive and emotional benefits. Investors who use the best-in-class method select the most socially responsible companies in each industry, including the tobacco industry and other industries usually shunned by socially responsible investors, rather than exclude entire industries. This method might work for some socially responsible investors, but not for all. Not every socially responsible investor can stomach stocks of alcohol-producing companies, or sleep quietly at night knowing that firearms produced by companies whose stocks he owns are used in war.
Article by Meir Statman, author of “What Investors Really Want: Discover What Drives Investor Behavior and Make Better Financial Decisions.” Mr. Staman is the Glenn Klimek Professor of Finance at Santa Clara University and a Visiting Professor of Finance at Tilburg University – Netherlands
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