Unethical investments

8th October, 2005

Dear Economist,

I’m a very wealthy man. It occurs to me that I might use my fortune to express my values by investing in an ethical fund. Should I?

Anonymous, New York

Dear Anonymous,

Your actions will make no difference, even if you have billions of dollars to sling around. In principle, if enough investors refuse to invest in so-called unethical companies, then such companies will face a higher cost of capital and will find it more difficult to expand their operations.

In practice, this is unlikely. As long as a substantial number of investors look only at financials, they will seek out the pariah firms (oil companies, pornographers, management consultants) whenever they become cheap. The more ethical investors shun such companies, the more attractive they look to other investors.

Your decision will probably cost you, too. You often see ethical funds arguing that they achieve better performance. This is nonsense. Even if, by a staggering coincidence, the ethical companies are the only good investments, a profit-driven fund manager could pick them and do no worse than a fastidious one. The truth is, by denying yourself options, your ethical investment returns will tend to be more volatile.

Some ethical funds did very well during the technology bubble because they held dotcom companies, which don’t cause pollution or human rights violations. Others – such as the Ave Maria Catholic Values fund – did well as the bubble deflated for the converse reason: according to financial journalist Daniel Gross, it has shunned technology firms because they offer benefits to unmarried partners of employees.

Neither result proves anything about future performance. If it did, you could equally consider the high-flying Vice Fund. It is invested in gambling, alcohol, defence, tobacco… and Microsoft.

Continued on ft.com.

Update: In the New York Times again for free, so I’ve added the full text here.

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