Do You Invest Ethically?

invest ethics

Does ethics have a place in your investing strategy? This is a difficult topic, but it is more relevant than ever with the current conflict in Ukraine. Since the invasion of Ukraine, over 400 companies pulled out of Russia. This is to help support the sanctions and to show solidarity with their customers, investors, and the international communities. However, some companies remained open for business in Russia. If you’re an investor in one of those companies and disapprove of the invasion, what would you do? Would you sell stocks of businesses that don’t follow your moral compass? “Defense” companies like Lockheed Martin are doing quite well this year in comparison to other segments. Do you care if your money goes to support instruments of war? Or should investment be just about money?

Ethical investing is deeper than the current news cycle. Honorable people act according to their moral compass. Why should investing be an exception?

There are many other segments that provide products and services that might not agree with your ethics. I don’t smoke because it causes a lot of health problems. However, I invested in Altria, a tobacco company. That’s a clear case of hypocrisy. However, I’ve cleaned up our portfolio over the last few years. I got rid of stocks like Altria and avoided companies that prey on their consumers. Of course, I could be even more active with my investments. I should avoid companies that encourage racism, sexism, environmental destruction, fake news, and a host of other issues. However, that’s harder to figure out. I’m still working on it.

Is ethics important in investing?

Ethics in Engineering

When I was in college, there was a mandatory class we had to take – Ethics in Engineering. At first, I was confused. What do ethics have to do with engineering? You just work on your assignments and get paid, right? Well, it turned out the class was quite interesting. Some engineers are placed in a position to determine the safety of consumers and other bystanders. They need to stand up for safety instead of bowing to the pressure from management to release shoddy products. I learned a lot from the class. You need to consider ethics with every decision in life.

Here are a couple of cases that we studied. They are quite interesting. 

The Space Shuttle Challenger Disaster – The engineering team recommended putting off the launch due to low temperatures. They were concerned that the o-rings might fail. The management team swept that concern aside because there was pressure to accomplish a big event and launch anyway. (The launch was already delayed several times.) Afterward, NASA tried to cover up the o-rings concern. Here is a good video about the Challenger Disaster from the engineering side on YouTube.

The Ford Pinto – Ford performed a cost-benefit analysis and concluded that it was cheaper to pay off lawsuits than to fix a flaw in the gas tank design for every Pinto. You can’t blame the engineers for this one, though. I’m pretty sure this decision was from the management team. Although, the story was more complicated if you dig into it. Here is an episode about the Ford Pinto on NPR’s Hidden Brain.

These are serious consequences when you ignore ethics. Our choice in investment isn’t at that level, but we still should still consider ethics when we invest. Why should we support companies that don’t align with our moral compass?

Let’s look at how companies are behaving in Russia.

Companies staying in Russia

Yale maintains a list of companies doing business in Russia. Many pulled out, but a few remained. Yale made it a bit more difficult by putting the companies in 4 different categories.

1) WITHDRAWAL – Clean Break: companies completely halting Russian engagements; 

2) SUSPENSION – Keeping Options Open for Return: companies temporarily curtailing operations while keeping return options open; 

3) SCALING BACK – Reducing Activities: companies scaling back some but not all operations, or delaying investments; 

4) DIGGING IN – Defying Demands for Exit: companies defying demands for exit/reduction of activities 

Ukrainian people are dying every day and everyone should do what they can to help stop this conflict. We shouldn’t support companies that aren’t pressuring the Russian government. I’d rather invest in companies that have some ethics. Our dividend portfolio has over 50 stocks in it so I was wondering where they stand.

First, let’s look at the worst offenders (category 4) – the companies that are open for business 100%. Fortunately, none of my companies are in this category. There are some well-known companies in this category, including Subway, Haliburton, and Koch industries. Oh, Subway…

The number of companies in category 3 is larger – companies that are scaling back. We have a few of these companies in our portfolio.

  • Abbott Labs (suspend non-essential business activity)
  • Abbvie (suspend aesthetics operations but not others)
  • John Deere (suspend shipments into Russia only)
  • JPMorgan (wind down business in Russia but buy Russian debt)

Hmm… I guess they are doing something so I’ll give them a pass for now. Although, it seems like they could do so much more. Is Abbvie’s aesthetics division a big part of their business in Russia or is this suspension just window dressing? It’s hard to tell. I’ll keep an eye on these companies and hope they do more to support the Ukrainians.

Most companies we own are in the first two categories (Withdrawal and Suspension) so I’m happy about that. For now, I feel okay about our portfolio.

Ethics In Investing

Should you consider ethics when investing? If you follow your moral compass in other areas of life, why should investing be the exception? These days, I don’t invest in companies that directly harm other people even if their business is great. That’s a pretty low bar. But many investors don’t even care about that. As long as the company makes money for them, they’re fine with it. We need to consider some ethics when we invest. There are so many companies to invest in. Why support unethical companies when there are so many other choices?

*Sadly, I’m still a hypocrite. We invest in index funds and they include companies that don’t pass my low bar. I invest in ESG (Environmental, Social, Governance) funds where I could. But these are not available in some accounts.

What about you? Do you care about ethics when investing?

*Passive income is the key to early retirement. This year, Joe is investing in commercial real estate with CrowdStreet. They have many projects across the USA so check them out!

Image credit Tetiana SHYSHKINA

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Joe started Retire by 40 in 2010 to figure out how to retire early. After 16 years of investing and saving, he achieved financial independence and retired at 38.

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17 thoughts on “Do You Invest Ethically?”

  1. Although its been a few days since this was posted, I believe its likely difficult, if not inconsistent, with the idea of passive investing. This does not even begin to cover the fact that I am not about to outsource my ethics to either the UN or an investment firm because neither has a great history on that issue.

    IMO, the whole point of passive investing it to set it and, relatively, forget it. However, to “invest ethically” you would have to follow the goings on not only of each fund, but then do a further dive into each of the companies encompassed within. What I mean is say you invest in a whole market fund that will likely contain companies which one has an issue with. Are you just going to pass up a whole market fund just because one out of 100 companies you find ethically questionable? This is only further complicated because there are likely companies which you think are okay, but may have a division or subsidiary which, if you knew about it, you would find ethically objectionable. For this, the American examples I can think of would be Monsanto and Koch. While one may have an issue with what one (or several) divisions do or even what ownership does, that may not cancel out the overall “good” that the company does. And on the flip side, I am willing to bet that everyone will be able to find at least one Berkshire Hathaway company which they deem unethical (and it will be different for every person) even though most do not find Berkshire Hathaway, as a whole, ethically objectionable.

    Now if you are investing in individual stocks, one can make that determination as part of your research, but then that takes you out of the passive realm.

    Reply
  2. Great topic to discuss, Joe, but also very difficult for an index investor. If I were investing in individual stocks, then I might be apt to pick and choose a little more than just focusing on the potential returns. But when you buy the whole index, you basically just get what you get. I haven’t dug into it, but I would imagine that there are plenty of companies in VTI that wouldn’t necessarily be the best choices to match my ethics or morals. I’m not even sure how I would do that without spending hours every day researching and understanding every company and then investing accordingly. Very tough area.

    Reply
    • You could invest in ESG funds a bit if you want to support the idea.
      Most of our portfolio is invested in index funds as well. But we have some in ESG and it’s been okay.
      That would be the easiest way for an index investor.

      Reply
  3. I do! I’m glad you wrote this post because often we just look at the return, not how our money is being used. Most people wouldn’t buy a bottle of detergent if it had a picture on the back of children sifting through a plastic-littered river, however some companies like that are within the portfolio of “winning” funds. Environmental, Social, and Governance is crucial in investing. I’m all about it.

    Never thought about the Ford Pinto example, but that just goes to show how having that ESG methodology could have been instrumental there.

    Reply
  4. I do not. I also have to question the use of the word “ethically” as it is used subjectively. Who claims a business is ethical or not? Who “appointed” (not elected) the people that make those claims and what are the claims based on? Sadly, it’s politics based more than needs, science, or Math based.

    It’s also the big problem that we are all going to soon have with ESG investing. Created by the UN. The board who creates ESG policies, were “appointed” by the UN. They will instill their social values into every company over time through a system based on shaming rather than reality. The policies are just in their infancy now, just wait 10 years. Giving companies a virtual “scarlet letter” or low social credit score and penalties if they don’t comply.

    Reply
  5. I agree with everyone else, this is a super tricky topic. For me, the most difficult thing is parsing out what actions will hurt the Russian government/oligarchs the most, while limiting harm to the citizens.

    I’m admittedly not very knowledgeable about the economics, but maybe companies like Subway and others are able to maintain a level of price stability on certain foods for the average person (not trying to excuse Subway here… I just don’t know).

    From a more generalized point of view, I’d be interested if a large broker created a version of a total stock market index, but excluding the morally reproachable companies (does that exist?!).

    Until then… VTSAX it is ?

    Reply
    • Vanguard has an ESG fund – ESGV and VSGX. They seem tech-heavy, though. That’s probably the reason why they are not doing that well recently.
      I have some money invested there. Although, most of our portfolio is invested in the broader market.

      Reply
      • This is the route we took with our after-tax investments. When our savings account got unnecessarily large, I explained ESGV to my wife and we started shunting extra money in there. We’re happy to miss out on a % or two of growth if it means we aren’t actively supporting RTX and LME and PM.

        Reply
  6. Great topic, but it’s one that requires deep thought. That’s not something you frequently find in blog comments.

    Being ethical is not simple. For example, is it ethical for a drug company to pull out of Russia, knowing that many Russians will suffer without those life saving drugs? Many of those Russians might not be responsible for the attack on Ukraine. Is that right to refuse them those drugs?

    I honestly don’t know the answer… but the court of public opinion seems to think it’s the right thing to do right now.

    Reply
    • That’s what Mrs. RB40 said about the Russian people. Yes, they will suffer the consequences, but they need to wake up and understand that Putin is a bad guy. Many Russians still support him. We need to do something to jolt them out of complacency.

      Reply
  7. This is such a difficult question. I’m a hipocrite. I only use Facebook 3-4 times a year due to ethics (and I believe in putting my online time elsewhere), but I recently invested in Meta.

    In a lot of ways, you can find a lot of problems with many, many companies and it could make investing nearly impossible. For example, many big companies have bought back stock since the 2018 tax cuts. They didn’t use their money to pay their rank and file employees more. When a black swan event like COVID happened, many of the same companies took government subsidies.

    Maybe it goes back to the Yale scale, but determining an ethical company can be so subjective sometimes. It’s also not easy to research all this stuff. I’m sure there are some watchdog companies out there reporting on corporate ethics, but I can’t think of any off the top of my head.

    Reply
  8. “Ethically” is so subjective. One cannot judge what is ethical for another. If I invested purely based upon what I think is ethical – there would be very few companies I’d invest in.
    “Ethics” is not limited to ‘greenness”, or racism, or other currently popular metrics. What about morality — do I not invest in a company because the CEO is sleeping around and treating his family morally? Can any company that takes unfair advantage of another be “ethical”?
    The cancel-culture extreme views (left or right), need to get off their high-horse and be ethical THEMSELVES. Invest your money in whatever way you deem prudent. As for me, that is a globally diversified total stock fund.

    Reply
    • I agree that you can judge for others. But you can judge for yourself, right?
      I have a minimum investing criterion and I feel good about myself. Maybe I can expand it later. You have to start somewhere.

      Reply

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