Princeton Microfinance Lecture on Thursday, featuring Yours Truly

Guest Post from Divinity is in the Details

Well, not a guest post, exactly. I am just copying today's post from Divinity is in the Details right into my column.
Full disclosure - I think this blogger is pretty awesome; he is my son!

 

Investment and Justice

A few days ago I wrote about investment for folks in the 20-40 range.

Conspicuously absent from that post was a broad discussion of how ethical considerations ought to impact investment decisions.

There are a few basic approaches to Socially Responsible Investing (SRI):

• Negative Screening: this approach removes companies that the investor thinks are problematic. You might, for instance, eschew oil, military, or tobacco companies, any company that didn't offer domestic partner benefits, or any company doing business in Djibouti. Calvert offers a popular index fund with negative screens. The Social Investment Forum has more info here. Negative screening is premised on the hope that non-investment in bad companies will drive down their shareprices and incent better behavior.
  
• Best of Class Investing: this approach involves investors investing in companies which are least bad in bad classes with the goal of rewarding less bad behavior and thereby punishing worst behavior. You might for instance avoid Exxon and its efforts designed to discredit climate change research and instead choose to invest in Beyond Petroleum who has more investment in alternative energy.
  
• Active Ownership: In this approach you make investment decisions solely on the basis of financial calculus and business judgment. You use your portfolio to influence major firms through shareholder activism of various sorts like proxy proposals, voting, and letter writing.
  

Personally, I think Active Ownership is the most potent ethical investing approach. It creates the most momentum towards just outcomes and should have the best investment returns.

Personally, I invest with conventional financial firms and use index funds where possible as i described earlier. As my portfolio grows i expect to allocate 1-3% of it to bellow market investment activities designed to produce social returns such as:

• investing in community redevelopment organizations who offer targeted loans to businesses and individuals designed to create desirable urban outcomes.
• investing in global micro lending.
  

Additionally I commit to dispersing 10% (or more) of my post-tax income to justice creating activities. You can read more about my approach to tithing and what i did last year here.

Frankly, in one's 20s and much of one's 30s the amount in retirement savings accounts will be modest. The work of our hands is much more substantial in actually impacting the world than anything we do with our money. It is important to concentrate on the question of whether our day job makes a difference. Are we teaching a new generation of folks? Helping create political change? Economic change? Are we bringing people joy? Helping people learn? Creating culture? Is the world getting better because of what we do?

If the answer is no, we aren't making much of a difference in our days, that is an important problem to fix. Get in the habit of giving now. I recommend tithing highly. Eventually when you have saved lots of money and 1-3% is a sizeable sum in real dollars, start using those dollars towards justice investment.

If you are very excited about negative screening you can sacrifice 1-2% or so of returns to use Calvert's more expensive alternative to an S&P 500 index fund. If you earned a 11.2% return over 40 years as the S&P has, after 40 years you'd turn $1 into about $83. If on the other hand you earned 9.7% (1.5% less) in a negatively screened fund your $1 would turn into $37 after 40 years of compounding. Little differences in fees and returns make extraordinary differences in the long term. if there was a good negatively screened fund that mimicked the funds i recommended from vanguard at similar fees I'd recommend them. I don't think such funds exist and tend to think that negative screening makes at best a marginal impact on the companies invested and not invested in. A marginal social impact is a poor reason to accept half the return over 40 years.

Do You Have Any Financial Goals? If So, You're Ahead Ahead of the Game!

I have been reading a lot of FM blogs which focus on the details of financial management. Some of the instructions are extremely complicated, with a myriad of options that become dizzying, rather like dieters focusing on the precise calorie count of every imaginable food. I read a good antidote in an article by Walecia Konrad in AARP magazine. (Sorry, it's not linked online.)
"People with financial goals have more than double the wealth of those without, according to a study by scholars at the University of Pennsylvania and Dartmouth college." It sounds so self-evident as to be a joke, or maybe an article in The Onion, kind of like "people with a map are 50% more likely to find their way to their destination", but apparently it's not so obvious. A goal focuses your attention, and then your energy. If you and your life partner share that goal, it focuses you on a joint project. Meeting financial goals requires deferred gratification, something our materially-jazzed society does not reinforce. So the details don't matter as much as having the plan to being with.
Likewise, having a goal for charitable giving/philanthropy focuses one's attention on donating. Before we adopted our tithing goal, we sent off checks as we went through the year, meeting our charitable obligations and then making additional gifts when the cash flow was good. At the end of the year we would add it up and try to increase it the next year, but our goals were very vague. We didn't skimp, but we didn't have a clear vision, either. Having a firm goal gives us an actual budget to work with, and a framework for thinking about our charitable priorities and allotting the pot accordingly. Much better approach.
Likewise, we recently set a goal of investing 1% of our net worth in directly social responsible entities, a goal put out by Co-Op America. At the moment we have funds at The Reinvestment Fund which earn a below-market return, fixed-rate competitive CD's through Equal Exchange, and a variable rate with RSF. Before the goal, we had TRF investments, made because someone solicited our involvement. We reinvested, since it didn't require any action, but we didn't get around to adding to that investment. (One really off year, when the stockmarket tanked, the TRF 2% interest was our best return!) Once we set the goal, we did the research, made the decisions, and completed the paperwork to make the investments happen.
I can see why you need a plan to get anywhere! No goal, no action. If you have a plan, even if you don't meet all your goals, you're still way ahead of where you'd be if you were just winging it. So don't beat yourself up too much if you don't get every detail right.

Unemotional Investing: a Boring Goal!

It's a basic tenet of investing: don't get emotionally attached to a stock, or you'll hold on to it too long. I subscribe to this for the vast bulk of investment. To say I am not emotionally attached to our mutual funds is an understatement - I can't even remember their names. The nuances of these various funds are known to professionals, but since I never read any of the annual reports which dutifully arrive, I have taken to receiving them electronically - so I can delete them. True confessions. Have any of you out there ever read a Mutual Fund's annual report?
I do take umbrage with the idea of being completely emotionally detached from one's investments, though. I think it's good to own stocks in companies you admire. I like to reward good corporate behavior, and I want to invest in companies which provide win-win solutions. I hope they will make me money over time, but also I like being part of the solution, and not just benefiting from the old paradigms, even if my return is lower. And I actually look at their Annual Reports and enjoy learning more about their plans, challenges, and approaches. Starbucks, one of "my" companies, even sends me coupons for free coffees along with the report.
Yesterday I invested in such a company, Metabolix. I read about it in Sierra club's magazine and learned they manufacture plastic from plant material. That means it doesn't require petroleum to produce it, and that it is biodegradable - sounds like a growth industry to me, at least I hope so. This from their website:

National Survey Reveals More than 70% of Americans Don't Know Plastic is Made from Oil

April 20, 2007

Cambridge, Massachusetts. According to a nationwide online survey released today, 72 percent of the American public does not know that conventional plastic is made from petroleum products, primarily oil. The survey was conducted by national online market research firm InsightExpress for Telles™, a joint venture of Metabolix, Inc. (NASDAQ: MBLX), a company using bioscience to provide clean solutions for plastics, fuels and chemicals, and Archer Daniels Midland (NYSE: ADM), one of the world's largest agricultural processors and the world leader in BioEnergy.

Plastics are everywhere and most Americans have come to rely on plastics in all aspects of their lives. However, very few people realize that plastics are made from oil, further contributing to the problems of energy dependence, greenhouse gas emissions and depleting resources. In fact, nearly 10 percent of U.S. oil consumption - approximately 2 million barrels a day - is used to make plastic.

The survey also revealed a misunderstanding about another important characteristic of traditional plastic - it never goes away. Despite the fact that petroleum-based plastic will never biodegrade, 40 percent of respondents believe that it will biodegrade underground, in home compost, in landfills, or in the ocean. Plastics will not biodegrade in any of these environments. In fact, the only way to rid the planet of existing plastic is by incineration in those cases where it can be recovered.

"Everyone knows about our country's unhealthy reliance on oil and the impact that petroleum use has on climate change," said Jim Barber, President and CEO, Metabolix, which has developed a brand of fully biodegradable Natural Plastics. "Similarly, people see a lot of plastic waste in the form of litter. But the fact that so many people are unaware that plastic is made from oil and that it will persist in the environment for thousands of years, shows the need for education about the impact of plastic on the environment and the various alternatives made from renewable resources."

I don't recommend investments, of course, though this one was flagged by some pros. I just think it's important to not be completely wishy-washy about what one invests in. SRI screens are a more detached way to do this, but becoming a direct shareholder is up-close and personal. What do you all think? It is crazy to be impulsive and mission-driven for at least some of your investments, or not?

Daffies: An Interest-Bearing Investment in Beauty

It's been really cold here so the daffodils are lasting a long time. They are magnificent. One of the magical things about daffodils is that they naturalize, which means they multiply. They don't do this under all conditions, as I can testify, but under the correct conditions each year more come up. Talk about a great deal! I am very grateful to all those in my neck of the woods who invested time and money in planting flowers in years past, the results of which we all get to enjoy. It doesn't take a lot of time, and they give so much pleasure. Planting and tending flowers in the 'hood definitely is a form of socially responsible investing, in my book. Enjoy!

Socially Responsible Investing a la Rambam

Maimonides constructed a scale of charitable giving that is still widely regarded, from the most grudging to the most effective and open-hearted. Those of you who went to Hebrew school may recall his image from your blue notebooks with black print.
A younger friend has asked me to get together to talk about Socially Responsible Investing, and I am delighted, as well as challenged, to do so.
Here is a stab at a SRI scale.
From bottom to top:

1. Benefiting from socially destructive, illegal activities: directly profiting from nasty stuff like prostitution, drug running, war-profiteering etc. Hopefully you cannot buy stock in such enterprises.
2. Benefiting from socially irresponsible, legal activities such as tobacco, alcohol, ammunitions etc. which also oppress workers, pollute, and generally have harmful side-effects to their activities. There is just such a fund, VICEX.
   
3. Investing in socially irresponsible products which are manufactured with good environmental and labor policies. Think a handgun factory with unionized workers, carpools, and advancement opportunities for women and minorities?
4. Investing in socially responsible products with bad work conditions, like eco-efficiency product manufactured in Chinese pollution-spewing sweatshops....
5. Investing in benign products which are screened for worker fairness, pollution controls, et al.
6. Investing in socially beneficial products which are screened for fairness, pollution controls, et al. Maybe you could buy shares in a worker-owned wind farm with a minority female CEO?
7. Investing directly in socially responsible activities through microfinancing, community investing, etc.

I would love discussion about this. We own lots of mutual funds and don't really pay too much attention - or any attention at all - to anything but their bottom lines.