Are These Investments Unethical? Does it Matter?

by Darwin on March 28, 2011

With investment themes like “socially responsible” funds, ethical funds, religious funds, green investing and the like springing up to cater to the whims of conscientious investors, I thought I’d get your thoughts on various types of investments I’ve come across or invested in myself.

 

  • Lending Money at High Interest Rates – These days, it’s tough to find a blog that isn’t highlighting peer lending groups like Prosper.com or LendingClub.com as a great way to either invest or lower your interest rates.  In essence, through some nifty financial innovation and the web, if you’re currently paying 25% on a high interest credit card, you can now borrow at say, 13% through a peer lending group and investors might be able to lend at say, 12% while the spread goes to the company for facilitating the transaction.  Everyone wins, right?  It does sound reasonable to me, but some people view this as taking advantage of people, akin to payday loans, albeit at nowhere near the interest rate.  Some states have usury laws and other prohibitions against personal lending of this sort.  Then, there’s always the microlending world where even triple digit annualized loan rates are seemingly acceptable.  If some villager can borrow enough money for a cell phone and some inventory, they might completely change their lives and pay back the loan with interest no problem.  But like any financial innovation, there are always unintended consequences and extreme examples of abuse.

 

  • Life Settlements – Is it unethical to invest in something where the payout depends on someone dying?  In a nutshell, there’s an entire industry brewing where investors can buy out life insurance policies of people in need of immediate cash and they capture the difference in “anticipated” future premiums plus a profit.  I was recently approached to invest in a fund of life settlement policies and questioned whether this might be a life settlement scam (many possible red flags to consider) or a legitimate high yield investment.  I’m still thinking through the ethics piece, then the due diligence on the advisor before I consider any further.  But if you were offered a 7% return for no volatility, no correlation to equities and tax-free (possibly, need to confirm), would you invest in these instruments?  Depending on whether you assess these transactions as “predatory” or just a benefit to the policy holders who would rather have cash now while they’re alive, I guess your perspective can change dramatically.

 

  • Tobacco Stocks, Gun-Makers and Other “Bad” Companies – Tobacco stocks are the most obvious poster-child for ethical investing case-studies.  Any time an ethical fund or “socially responsible” fund is being cooked up, it’s Big Tobacco that’s first on the list of stocks to avoid.  Usually weapons manufacturers make the list as well since we know what their products are for.  Then, you might have some alcoholic beverage companies, perhaps some genetically modified seed manufacturers and then you may even make your way over to health insurers, Wall Street Firms and finally, BP.  It’s more a matter of personal opinion and agenda than a science when justifying who’s in and who’s out, but no doubt, tobacco’s always on that list.  So, knowing that you’re investing in a company that makes a product that is factually known to harm and kill people and arguably, targets young adults and children, would you invest?  Typically, these stocks tend to have abnormally high dividend yields and trade at low multiples to account for the litigation and social risk you’re taking.  Many retirees and pension plans tend to favor these stocks for the yield.  Would you invest?

I’m sure there are other investments I didn’t think of.  I’d be interested in hearing your take on what’s missing, what your thoughts are on ethical investing and whether it even matters.  I ask, because some would say that in an efficient market, even if you don’t invest for ethical reasons, someone else will at the right price, so avoiding “unethical” investments doesn’t matter in the grand scheme of things.

What’s Your Take?

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{ 9 comments… read them below or add one }

1 JT McGee March 28, 2011 at 8:48 pm

None of these are unethical, as far as I’m concerned.

The way I see it is that each, even the extreme life settlement contracts, provide a good or service that people are willing to pay for. If you have a problem with the company itself, then there’s only more reason for you to buy it, suck some money out of it, and use the proceeds how you see best fit.

Even if you don’t own it, someone else will, and ignoring each product doesn’t meant that they’re going to go away. If you can’t tell, I don’t subscribe to the idea of “socially responsible investing.”

[Reply]

Michael D Harris Reply:

@JT McGee,

You can justify anything, the question when it comes to ethics is where is YOUR line. My barrier is very high, and limits the funds I will invest in. . . but I ALSO will be able to sleep well at night knowing that I have done everything in my power to chose companies which benefit society not hurt them.

[Reply]

JT McGee Reply:

@Michael D Harris,

Sounds great in theory, except these companies will exist regardless of who owns them. I’m glad people like you put conscious before money because it only means more money for me. :)

Thanks!

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Michael D Harris Reply:

@JT McGee,

Why would that mean more money for you? You still have to choose your investment wisely, you can’t just throw money on an amoral company and watch it grow. In fact, you most likely will LOSE your money investing in an amoral company (think Enron).

BTW, a lack of morals isn’t something to be proud of either, it is something that is shameful such as bigotry or hate. Then again, what people define as amoral is different from person to person, so what is morally just for me may be amoral for you or visa-versa. There is nothing wrong with putting money above your social conscience, the problem is being proud of it. Something that you may learn in your life. . .or maybe not. . .

JT McGee Reply:

@Michael D Harris,

Supply and demand. Sinful investments have to offer more, since there simply isn’t as much demand for them. Darwin points out the litigation factor, but there are plenty of qualitative factors as well. Even in “efficient markets,” the perceived societal cost/benefit becomes a factor. A significant portion of the market wants nothing to do with them.

The investments above aren’t even in the same universe as Enron in terms of being “unethical.” Enron cooked their books, Philip Morris International sells a highly-addictive product to people who want and crave it. Big difference.

You mention below that you own a solar company; how do you justify such a position? You know that any business that puts up solar panels this year gets a straight up check from the US Treasury for 1/4th of the cost, right?

Who do you think is paying for that? How is your benefit at the cost of the average American socially-responsible?

You know, there are millions of people around the country that will wake up tomorrow morning and tell their kids that they’re sorry that they’re going to school hungry. These millions of people will then walk miles to work before slaving away for low pay, 40 hours a week, just to get by.

At the end of the week, they’ll get their check, but first it’ll be reduced by income taxes. A portion of that income tax revenue will be funneled to you, indirectly, so that you can have the luxury of even having a few minutes a day to comment on a blog.

Why don’t you see a problem with that?

When someone in India goes to buy a box of cigarettes from Philip Morris International, they make a conscious choice to spend their money how they see fit. Apparently, that’s unethical for me to own a company that benefits from their own decisions.

But when SOL enjoys a growing customer base thanks in part to an involuntary transfer of wealth through the disgusting institution that is the US tax code, you’re the most ethical and amazing investor on the face of the Earth.

You do know what happens when people don’t pay their taxes, right? Jail. What happens when someone doesn’t buy a pack of cigarettes? Nothing.

You’re plenty free to call me unethical and question my ability to sleep at night, but please hold yourself to the same standards.

If anything, I’m unethical and I’ll admit it. You’re unethical and you won’t. I’ll give you that minor consolation prize.

[Reply]

BadBoysDriveAudi Reply:

@JT McGee,

Well said. I subscribe to the theory that people make choices to buy products/services and I’m free to make choices of whether I want to invest in the companies behind those products/services. Sometimes I don’t entirely like how the company conducts itself (cough cough…BP) but I also recognize that this company isn’t becoming insolvent due to public opinion, there’s money to be made and no one is forcing the products on the backs of consumers.

2 Keith March 28, 2011 at 9:29 pm

When you invest in a company, you are an owner of that company. If you know that management is engaging in unethical practices (child labor, environmental destruction, unsafe products, you name it), and you don’t do anything to stop it, you are complicit. Arguing that a) an activity that is legal is always ok, and b) someone else will just do it if you don’t is a huge moral cop out, imho.

I think it is important to remember that the purpose of the stock/debt markets is to provide companies with a source of capital. If less investors are willing to put money into a company that engages in unethical practices , that company’s cost of capital will increase. So yes, I do think that it ultimately matters, even if an individual’s contribution may be small.

The hard part is determining what is moral and/or ethical for you . Personally, I have a simple rule where I try to avoid any company in which I wouldn’t want my friends and family to know I had invested in it.

[Reply]

3 Michael D Harris March 29, 2011 at 10:27 am

There is no ethics in a Capitalistic system period. When the bottom line is money, not humanity, there isn’t a need to have ethics. Capitalism is one 0f the ism’s that is devoid of ethics, and we have hundreds of years, with thousands of examples to choose from. With that being said, where you put your money is ultimately up to the individual investor. For me, I will not invest in companies that I deem are parasitic to society. There are a number of these companies, Raytheon (my friend is an employee and I routinely ask him if he has killed any babies recently, or if he has reached his dead baby quota for the month), big oil, Walmart, McDonalds (most fast food places), the ones you mentioned as well. It is a PERSONAL choice, and I have decided to put my money on companies that I believe have a net positive to society. I am invested heavily in green technologies, the company I work for (iRobot), renewable energy, and where I think the future growth is going to me (ie cloud computing, China internet companies, solar, rare earth metals etc.) I also invest in highly volatile single stocks with an in and out mentality of a day trader. Over the past year that I have been investing, I have done well. I am 25% over market this year, and I was 17% over market last year. I have been getting on average about 6%/month in up months, but I will lose 20% in down months. I can handle the volatility though, as I am in the early stages of investing and I only have under $20K in the market now.

With that being said, right now I have 1000 shares of SOL @ $9.13 (Renesolar a Chinese solar company with great numbers and growth) and 1000 shares of LYSCF @ 2.07 (Lynas Corp. an early stage Rare Earth Metal company out of Australia). I should have put money into Molycop (MCP), but I am going to ride this one out for a little while. If I find out more information on the company, that they are not ethically sound (ie contamination of the environment) I will put my money elsewhere. It is a choice I make as an investor, and how I like to live my life. Everyone has their own personal choices, and if they put making money above all else, it is their own prerogative. For me however, I made the personal choice to only invest in companies which I believe have a net benefit to society and there are not other societal costs they are impinging on us all.

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4 Evan March 29, 2011 at 10:35 am

I don’t think any of the examples you gave were unethical or immoral…
1) P2P lending is a great service and nothing like payday loans (although I don’t even think payday loans are that bad so…)
2) Life settlement – You made a bet with an insurance company you were going to die eventually lol where is the harm in buying that bet from someone?
3) Tobacco/Guns/firearms – Again, I don’t look at these as evil companies. Maybe if you put up a public company that produced Heroine or Crack

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5 Tony DuBon March 29, 2011 at 10:46 am

I agree that there a capitalist system is amoral. However, that does not mean that the society or the individual needs to be amoral. A society, a culture, a country, an individual can all make judgements about how they will engage and participate with economic players whom they determine are immoral. I make the decision not to invest in some companies because I think their products are detrimental to people (tobacco companies) or “mankind” (defense contractors). The US regulates Wall Street (sort of) in an attempt to prevent the knowledgeable insiders from taking advantage of the rest of us. Our culture evolves in what Lily Tomlin called the “collective hunch” of what is good for us and should be translated into law. Each individual and each group of individuals make their own decisions about the morality of investments. Individuals reject the investment, groups, including lawmakers representing citizens, make decisions about how to constrain the capitalist system. Only the truly naive think that the US is unconstrained captalism.

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6 Jay lewis March 29, 2011 at 11:03 am

There are about 10,000 stocks and 20,000 options to chose from. Companies that profit by screwing customers are more likely to screw investors as well since that MUST be their nanagers mindset. If these are 10% of companies and Im still happy to buy puts on them, it leaves 9000+9000+10,000=28,000 opportunities to profit AND maintain integrity.

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7 Michael D Harris March 31, 2011 at 7:39 am

@JT McGee,

LOL looks like I touched a nerve huh. I would suggest you continue on living your life devoid of ethics/morals and go into banking (maybe you already are!). You are just what this country needs more of, greedy people who care nothing about each other, the environment, the country or even life itself. . .sigh. . . I bet you masturbate to Gorden Gecko’s “Greed is Good” speech in Wall Street.

You have every right to live your life like a parasite on society, and by putting the value of money above anything else, that is what you are doing, making money off others misery. Heck, in fascist Germany, there were companies that were making money off of killing Jews. . .think of the poison gas manufacturers. With you, it seems that’s AOK, and you would probably invest heavily because it makes you money. With me, I have just a wee bit more self respect and to not make money from companies like that. Sure it is a personal choice, one where I want to help society, not harm it, or should I say that I actually place the value of other things above the dollar. I know, sacrilegious in your world.

As for your outrageous stretch that the solar company is harming society because they are taking government subsidies, I will blow that argument to smithereens.

The poor people, have you not argued that they pay no taxes to begin with? So how is it that my solar stock is hurting the family on food stamps? YOU are the one paying for my solar stock’s profits, because I hear all the time how people like you pay all the taxes. So how again can it be that the poor pay the taxes, and they are the ones that are burdened with debt from taxes if they don’t pay any? Kind of missed that class on logic I see. That’s ok, I really don’t have to point out your faults as you do a damn good job of exposing your own deficiencies in your words. . .

Bottom line is this, as I said before you can justify anything in life, but it is up to the individual to justify in his or her mind what that line is. For you there is no line, for me it is really high. I don’t need to make money on companies that harm society, I am smart enough to make my money elsewhere. . .you. . .not so much o.()

[Reply]

Evan Reply:

@Michael D Harris,

I am really confused did you all of a sudden become ethical?

“I was once a commercial lobsterman, and ran my own business at 20. Now I am in the middle of setting up another business with my brother in law. I also work for defense contractors as a lead engineer…”

Is this you from Darwin’s tax post? You worked for a defense contractor but won’t invest in them? So you only build the weapons hahahahh not pay for them

[Reply]

8 JT McGee March 31, 2011 at 9:21 pm

Micheal, logic has failed you. It’s obvious to anyone who would spend the time to read this thread. To respond to another off-topic discussion would only fuel the stupidity.

You think it is wrong for people like me to own companies with which people choose to do business, but yet you can be the beneficiary of a system in which everyone is forced to participate. You can say I have no morals, no ethics, but you don’t either, if you use the same standards.

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9 Joe@TermLifeInsurance.com May 31, 2011 at 6:08 pm

Viatical life settlements are more common now than in the past in my opinion and for some people they do serve a purpose. The individual or family who is selling their life insurance policy shouldn’t at least talk with a financial advisor or trusted individual just as I would imagine people who are desperate or looking to borrow funds have asked the bank for a loan, reviewing balance transfer options or even sought help with a debt management company or personal loan through a family member. Perhaps our society today is not as personal whereby people and consumers are much more willing to help others but it seems capitalism may in some cases discourage people from helping out unless they get something in return.

[Reply]

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