Saturday, September 8, 2007

"socially responsible investing"

A student at Earlham College wrote me to ask about "socially responsible investing" (SRI). (And someone just asked me about the same topic the other day-- but I can't remember who it was.) I don't know about any formal literature, but it probably exists. Interested parties should search the Acton Institute website, stuff from the Christian economists and their publications, and any journals that have Ethics and a business-like topic X in their title.

Here's an edited version of what I wrote:

In terms of applicable economic theory, the easiest connection is to discrimination. To note, SRI's are choosing criteria unrelated to productivity/rate of return (RoR) to make decisions-- and are willing to discriminate against higher RoR to avoid ethical conflicts (to indulge their tastes and preferences).

As such, two basic outcomes are possible.

First, those discriminated against may suffer because SRI'ers are forgoing what would have been mutually beneficial trade for both parties. (That would seem to be part of the intent-- as in the divestiture campaign against South Africa.)

Or second, those discriminated against may suffer little at all. If SRI'ers choose investments from within their preferred field and non-SRI'ers choose investments within the "unethical field", RoR could even out between the two sub-markets. (Even if one cannot punish the unethical, one might well choose this option to avoid conscience issues.)

As an aside, if talking with SRI'ers, it might be interesting to compare this with the way they view the extent to which [racial or sexual] discrimination causes damage to the discriminated against! Does racial and sexual discrimination cause significant or minimal economic damage-- and why?

As a practical matter, I would add that it is very difficult to do this sort of thing with any consistency. Wherever one draws the line, it's almost certainly the case that those related to alternative investments are likely engaged in equally troubling activities. This would seem to call for a prohibitively exhaustive investigation into any investment.

A more reasonable fall-back position would be that one should not, for sake of conscience, invest in something one knows to be immoral. The follow-up would be that such a standard should be observed while recognizing the incentives introduced for others to take advantage of my tastes and preferences (e.g., selling me an investment that fits my preferences but mostly benefits the one who sells it to me). In other words, ironically, these people are likely to be treated in an unethical manner-- as people try to take advantage of their heightened moral sense!


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