The Moral Investor: A growing tide of investors are looking for socially responsible ways to make money

Published: Wednesday, Oct. 17 2012 8:09 p.m. MDT

Over the past two years, Woodward has, with the help of her financial advisor, gradually transitioned from a traditional portfolio that she inherited from her mother, to what she calls “a more sustainable one.” In addition to eliminating oil stocks, she’s invested in a real estate investment trust focused on sustainability practices such as energy efficient buildings. She’s also put money in a Calvert SRI mutual fund, which invests in socially responsible companies and Self-Help Credit Union, a non-profit entity serving “individuals, nonprofit and religious organizations, and other socially responsible people and institutions.”

“Performance is a bit off,” she concedes, “but I’m willing to give up a little. It feels good to make even a small difference. It takes so little effort. It’s worth taking a look so you can feel better about your investments.”

Vice vs. nice

Gerald Sullivan stares at the Grey Goose Vodka truck sitting in front of him on the New Jersey Turnpike. Traffic is stuck and Sullivan, portfolio manager for the Vice Fund, is on his cell phone defending his investments in alcohol, tobacco, gaming and defense companies. To him, it all comes down to return on investment.


“SRI is basically a nice story,” he says. “They’re probably well-meaning people, but on average they don’t do very well. If SRI funds can say you’ll feel better even if they underperform the market, then they’ve found the magic elixir. That’s great marketing. Academic research shows that the vice sector mostly outperforms the S&P 500 over the long-run.”



Some research does, indeed, bear this out. In his 2005 book, The Future for Investors, Wharton professor and investment guru Jeremy Siegel shows that a $1,000 investment in Philip Morris in 1957 would have returned $4.6 million in 2003. A similar investment in the S&P 500 would have returned $124,000.

The wages of sin



In addition to strong returns, so-called “sin” companies also provide tens of thousands of jobs and billions of dollars in tax revenue. Yet, what about the costs these businesses pass on to society?



For example, in the U.S., healthcare costs due to tobacco and alcohol consumption total nearly $275 billion a year. These costs inevitably show up in insurance premiums and taxes.



There is the human cost to consider as well. The Centers for Disease Control and Prevention estimates that smoking causes one in five deaths in the U.S. each year, and that 25 million Americans alive today will die prematurely from smoking-related illnesses. According to the World Health Organization, the harmful use of alcohol causes 2.5 million deaths each year worldwide. This is more than AIDS, tuberculosis or violence.


Sullivan responds that these companies are all legal. “If you think of what happened when we went to prohibition,” he says, “more people died from drinking because they drank poorly made bathtub gin. So by making it legal, you’ve made it safer. You and I can drink Grey Goose properly, but that one [irresponsible drinker] can’t.



But legality and ethicality are not the same thing, are they?



“What it comes down to,” Sullivan says, “is if you don’t invest in a stock, will they miss you?”



True enough, especially for the small, individual investor. But the reverse can also be asked: “If you don’t invest in a stock, will you miss them?”

The great debate



Joe Keefe, of course, sees it differently than Sullivan. Keefe is President and CEO of Pax World, originator of the first socially responsible mutual fund in the U.S.



“We need to move away from a system,” Keefe says, “where short-term profits are valued regardless of the long-term consequences of that activity. There is a great debate going on. Fundamentally, it’s a debate about the future of capitalism.”



For his part, Keefe calls for a transition from “growth capitalism” to “sustainable capitalism”.


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