What Is Your Thought On Socially Responsible Investing (SRI)?
Recently, I wrote about lending money on Prosper, which is one of the many peer-to-peer lending networks that are popping up everywhere. The post itself didn’t say anything about socially responsible investing (also known as, SRI, morally responsible investing or ethical investing). However, a lively discussion on this topic came up when Kevin stated his opinion as follow:
“…If these people were in control of their finances, they wouldn’t be borrowing money on the internet. Basically, you’re choosing to profit off of people’s idiocy and desperation. I don’t think that I, in good conscience, could do that to people. You’re participating in the destruction of people’s lives. Morally, I don’t think it’s a good thing to do and I don’t agree with it…”
If you read Kevin’s full comment and subsequent comments, you will find that he is sincere and strong in his conviction about this matter. For me, I am not as strict when it comes to socially responsible investing, and to which I replied:
“…For me Prosper is strictly another way to invest and grow my money. This is no different than investing in the S&P500 and being part owner of companies that profit from cigarettes, weapons, sub-prime loans, etc…”
And Kevin responded:
“…And no, it isn’t like investing in the S&P 500. The S&P500 doesn’t give you the choice of how your money is used. With social lending, you are directly engaging-in and advocating the behavior…”
My viewpoint was subsequently supported by one of my blogging friends, Brip Blap, who wrote:
“…And by the way, banks lend people money, as well — having a checking account or a savings account means that your money is being lent out to people in these situations. And if you invest in the S&P 500, you are directly investing in those companies and then they are using it for good or ill, just as the people I lend money to at Prosper are. If you buy an index fund, you are tacitly approving your money’s use by big pharma companies or Wal-Mart or defense contractors. I don’t see how you can say you can’t say how your money is used. I can’t tell people at Prosper how to use the money I loan them any more than I can tell Exxon how to use the money they got from me from my S&P 500 index fund investment…”
And another blogging friend, Mike from Quest for Four Pillars wrote:
“…If you take five minutes to look through the names of companies that make up the S&P500 you will recognise companies that sell alcohol, cigs, weapons etc pretty quickly and you have the choice not to buy that index. It will make investing a lot more work to avoid those companies (and as Brip Blap says, make sure you include the banks in this list) but it can be done…”
The point of this whole post is not to say who is right and who is wrong. I am sure we can find people to agree with either side. The point is there is no right or wrong when it comes to socially responsible investing. This is one of those very personal decisions that each of us make based on our core value, upbringing, and experience.
For me, investing is a tool to achieve financial objectives. If investing in the S&P 500, which components include companies like Citibank, ExxonMobil, and Altria Group means that I will achieve my financial objective more effectively, then I will invest in the S&P 500.
What is your thought on socially responsible investing? Specifically, do you think lending in peer-to-peer networks like Prosper and Lending Club is morally wrong? I would love to hear your perspective on this matter.
More about socially responsible investing:
- The Myth of Socially Responsible Investing @ The Motley Fool
- Unsure About Socially Responsible Investing (SRI) @ The Finance Buff
- Socially Responsible Investing Goes Green @ Wise Bread
- Does investing in socially responsible funds cost more and is it justified? @ Money Relations
- Socially Minded ETFs @ Boston Gal’s Open Wallet
This post was featured in the Carnival of Personal Finance #137 hosted by The Dividend Guy.
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Lol.
Where did the term SRI come from?
Here is the basic gist of my argument:
Instead of helping people, you’re enabling people. If you want to be an enabler, fine. If you want to be a helper, don’t do it.
Thanks for the fair representation of my quotes–you don’t see that very often these days.
Well, I certainly enjoyed the discussion we had although it was (as you said, Pinyo) one of those debates that is a little hard to settle, since the debaters are arguing an opinion (whether it’s ‘right’ to lend money) rather than a fact.
I used to worry about this subject a lot more than I do now. I think that socially responsible “living” is nearly impossible. Maybe No Impact Man is close, although I don’t know about his investment portfolio. I sold Wal-Mart stock, for example, because I decided the way in which they operate their company did not meet my personal values – yet I own VFINX which, as an index fund, owns shares of Wal-Mart.
P2P lending (for me, at least) is as morally neutral as it gets. If I put money in my checking account my bank lends it to someone as a subprime loan (which more or less every major US bank did). I am not sure where my responsibility begins and ends – and I think it’s a matter of perspective on whether you feel responsible for the use of money once it leaves your hand. I suggest that if you feel responsible for money AFTER it leaves your hand, you have little choice but to keep your money under your mattress so you can know exactly where it is and what it is doing. The second it leaves your hand it is caught up in a complex web of lending, investing, buying and selling that you have little control over.
My analogy might be selling alcohol to minors. If a 15 year old comes up to an adult and asks them to buy a beer, then the adult goes in to a store and does so, is the checkout clerk responsible if the 15 year old drinks the beer later on? If I put money in a Citibank checking account, then Citibank loans that money to a financially uneducated person as a subprime loan, am I responsible? If I loan money to someone on Prosper or Lending Club who says they need it to pay off a subprime loan, then they use it to pay for a plasma TV, am I responsible? I guess how you answer those questions is a personal choice. But I still stand by my assertion in the original debate that anyone who feels p2p lending is immoral has no choice but to withdraw almost completely from investing and banking if they want to be consistent.
Steve
If you’re investing for moral reasons, you’ll wind up disappointed no matter where you put your money. The links go on forever. I invest in a very moral XYZ company who pays a salary to Joe Average who puts it in Citibank who lends it at a high rate to a subprime candidate who over leverages their home by a couple of thousand and uses it to buy drugs. It literally goes on forever.
You have to do what is right according to your own conscience and let other people make their own decisions. Then, don’t judge them when they make choices different than yours.
If you don’t like where or how your money is invested, pulling it out doesn’t hurt that company. Even if ten thousand investors did the same thing, it would temporarily cause the stock price to go down, while at the same time increasing dividend yield and make the stock more attractive to other investors. Remember, your stock investments have very little to do with the revenues that the company produces.
Follow your conscience. And don’t look back. You’ll sleep better.
Some great comments.
The big problem I have with trying to invest in “socially responsible” companies or “green” companies etc is where do you draw the line?
No company is perfectly ’socially responsible’ or ‘green’ and no company is the complete opposite of perfect. It’s near impossible for any two people to decide exactly what a ‘green’ company is and even if you are trying to decide just for yourself, it can be pretty difficult.
Mike
I recently became a lender on both Prosper and Lending Club. I do not think it is morally irresponsible to do so. Those sites are not only for people who cannot get a loan. Sometimes people can get a loan but the interest rates are just not what they can handle.
As with any situation you will find honest people who use the money for good and you will find dishonest people who will use the money for something silly or they won’t pay the loan back. All you can do is trust.
I registered as a borrower too because I have credit cards from my college days when I did not know any better that have interest rates around 20% that I had balances on. If Prosper gives me the chance to refinance that at a rate closer to 10% isn’t that much better for me and the lender?
The lender gets 10% on their investment, compared to 1% in a regular savings account. I get to pay less interest over the time it takes me to repay the loan and I can raise my credit score much faster.
The essence behind the sites is neutral as far as I am concerned, it is the mindset of the lenders and borrowers we need to think about.
This was a really great post with some interesting discussion. Thanks for this!
I lend millions on Prosper AND I think it is very socially irresponsible. That’s the appeal. Seriously though, vice investing does perform pretty well. I think the reason is that vices are addictive, and addictive substances have a very low elasticity of demand. Built-in insurance against recession, inflation, you name it.
Personally I think that SRI is almost impossible to define, although many investment organisations will try to sell you the idea that you are investing in a socially responsible way. The problem with it is that it presumes that everyone has the same definition of what socially responsible means, but in reality we all have vastly different perspectives. For example an organisation that usually invests in arms companies or defence contractors could say they are taking an SRI approach if they switch to making more investments in oil companies. The reality is however that many of these oil companies will pay arms companies millions to keep them supplied with the latest weapons to defend oil depots and refinery’s. Other people will say that SRI is about only investing in not for profit organisations or similar sectors. It really is impossible to come up with a collective definition.
Good debate
Companies don’t have morals, so there’s no way to guarantee that any company ‘does no evil’. People invest to make money, if the company doesn’t make money people invest elsewhere. If TOO MANY people invest elsewhere, the remaining investors call for a change in corporate management. That usually leads to more profits, but not necessarily a ‘good’ company anymore.
If I wanted ot do something socially responsible, investing isn’t it. It’s at loggerheads from the beginning (social responsibility vs. profitability).
Even Ben and Jerry’s didn’t survive long enough to make a significant dent in the corporate karma.
Hi Pinyo,
Thanks for the link.
I agree with some of the previous comments. SRI is really hard to define. A lot of SRI funds use a best of sector approach unless they specifically ask the research company to screen out specific industries. It’s not perfect and just adds to the overhead of the fund.
There actually is a banking system in place that promotes ethical and moral investing. It’s called Islamic banking. I’m leaving the religious aspects out of it but if you want to go “hard core” in being responsible, that’s the model.
I don’t think you are morally irresponsible.
You are lending to people who have sought to borrow and have listed their reasons. If the reasons are not immoral, then by all means, you are ok.
But if unknown to you, they use the funds for something shady, then you cannot be held responsible.
Everyone will be judged by his/her intentions, so no worries.
Everyone, thank you for your comment. Again, great discussion here.
@Kevin – You’re welcome. I always like your thoughtful comment and perspective.
@Brip Blap – No Impact Man is an interesting site. And overall, I agree with you. SRI is very fuzzy. I am certainly better off not worrying about in when investing and redirect the energy to do something worthwhile for the society.
@Lulu – Great example of how someone can use P2P for “good”
@SJean – Thank you and you’re welcome.
@Harris – You’re a funny guy
@Make Friends – Another good example.
@Randall – “If I wanted to do something socially responsible, investing isn’t it. It’s at loggerheads from the beginning (social responsibility vs. profitability).” Simply put…yes.
@Mariam – No problem. Islamic banking…interesting. I will have a look.
@Fathersez – agreed.
its a term I’ve not heard before but rather one i take for granted, i wouldn’t invest in something that wasn’t socially responsible no matter how much it made me.
If we expand our definition of “socially responsible investing” to encompass more than just moral judgment…and we expand our actions to more than just exclusionary screening…then I believe that SRI really can do some good.
After all, we are in a capitalistic society and the purchase of various goods and services either encourages companies to continue producing those goods and services in the manner in which they produce them, or it discourages them. Simply selling the stock and divesting of the company may not do a darn thing (as Ron @ wisdomjournal stated). That might be equivalent to the old “I’m never eating THERE again!” type of action.
However, active engagement in a capitalistic society often DOES get some action. Writing letters to a restaurant might change that restaurant’s service pattern…and writing letters to a corporation (or voting your shares) might change that corporation’s service pattern. I know it won’t solve all problems inherent in a company…but the inability to solve ALL problems should never be an excuse to not try to solve SOME problems.
@Don — “However, active engagement in a capitalistic society often DOES get some action. ”
Excellent point.
the main issue with one-on-one lending sites is there is no vetting process. you’re taking people’s word that their story is true.
There are new platforms like microplace.com where you can actually lend through a microfinance institution and get a modest 3% return. Other SRI’s are screened funds comparable to other mutual funds.
For a review of the field, take a look at http://moneychangesthings.blog.....tails.html
@Betsy – there is some control with vital statistics like credit score, DTI, number of delinquencies, etc. So, I wouldn’t say that there is no vetting process.
As for 3%, wouldn’t I be better off with online savings or CDs in that case? I think 3% should be risk-free.
Thank you for stopping by.
I also agree with Lulu – if you’re lending your money on Prosper for a lower interest rate than what a bank would offer, you would be doing them a favor. However, if a bank is quoting them an 18% interest rate on a loan, then it’s likely that they’re a risky prospect to begin with. But if you’re willing to take on that risk, and offer a better rate than the bank, I guess that could be seen as being socially responsible. Although I always thought of SRI as investing in things like alternative energy or “green” companies.