Social Responsible Investing - A Couple Theories

Theory #1 - Short Term - The Impact
Thesis: Either socially responsible investors receive a lower rate of return than other investors, or their investment has little to no social impact.

The US economy has a standard rate of return on investment. This is the average rate that an investor can expect to get. Of course this rate fluctuates all over the place due to economic cycles, and it is difficult to predict what it will be in the future. However, there is still an average rate of return.

Regular investors will invest in companies which they believe will give them this rate of return or better. These investors do not care if the company is socially responsible or not, and will thus provide enough investment to both responsible and irresponsible companies up until the point where any additional investment would be less productive, and provide a below-market rate of return.

Before responsible investing existed, irresponsible investors funded everyone.

Now when responsible investors enter the market, their money displaces that of the irresponsible investors - moving some of it from responsible companies to irresponsible ones. What happens is that responsible investors bid up the price of responsible companies by say 0.1% (or some other marginal amount), and irresponsible investors quickly move their money into irresponsible companies - because this marginal price increase is completely irrational from their point of view as it is not based on any increase in profit potential.

Thus until there is no more socially irresponsible investor money to move from responsible companies to irresponsible ones, the price of responsible corporation stock (and also the cost to them for borrowing money) remains the same. The responsible company recieves no benefit from the responsible investment.

However if there is so much social responsible investing that all of the irresponsible investment is displaced, then any extra responsible money will go to fund expansions of existing responsible companies and the creation of new ones. The only way that expansion and new companies will be able to succeed is if they receive loans or other funding (through stock sales for instances) at below-market rates. For if they could have funded their expansion by paying market-rates, they would have already done this by getting the money from the irresponsible investors. Paying below-market rates will benefit responsible corporations and society, however it means that responsible investors will receive a lower rate of return.

Conclusion
Many current social responsible investing promoters want to have it both ways. They want to have a positive social impact AND get the same rate of return. Obviously the situation is more complex than my argument above. There are transaction costs, the difficulty in predicting anything, and other issues that I haven't explored. However I think that my argument is an important challenge to the social responsible investment movement.

Theory #2 - Long Term Impact
Thesis: In the long run, investing responsibly will make you more money than average if the country is moving to the Left, whereas investing irresponsibly will make you more money if the country moves to the Right.

If the right does well, then energy and resource companies will benefit from less regulation, defense contractors will enjoy increased sales, and union-bashing firms will be able to get away with terrible labor practices. If we had a stronger Left, we should have been able to make energy companies and their shareholders pay for the financial disaster of building nuclear power plants (instead consumers got stuck with a lot of the cost - there is substantial charge for this on my PECO bill).

If the Left gets stronger, the labor movement could grow and pull off major victories like unionizing Walmart. This would raise Walmart's costs, and benefit Walmart's more socially responsible competitors and people who had invested in them. A stronger Left would be a major boon for renewable energy companies.

Now where it gets more complex is that you have to take into account other people's predictions about the future. Thus many people are expecting renewable energy to grow rapidly in the future, so the cost of renewable energy stock/investments already reflects this expectation. In this case, you'd only make money if the swing towards environmental consciousness was greater than expected.

Prediction: the USA is due for a leftward swing. But that just might be my wishful thinking.

Theory #3 - Social Consciousness --> Socially Responsible Investing
Thesis: Social consciousness happens first. People are socially conscious and then discover social responsible investing. Social responsible investing has only a marginal positive impact on individual social consciousness.

This is an argument about the direction of causaulity (aka what comes first, what causes what).

It makes a big difference, because if my earlier argument is correct, then if socially responsible investing doesn't help responsible companies and if it only has a small impact upon indvidual social consciousness - then it ends up being a bad tactic to use if you want social change. I think it's still worthwhile to promote responsible investing, because I'm probably over-stating my case, but that there are also better strategies to use.

Overall Conclusion
An alternative strategy is for people to invest their money in anything they want. If they have extra money, don't loan it to a so-called "responsible" corporation - which is only "responsible" in the loosest sense of the term. Give your money to directly fund democratic radical social change organizations.

For institutions, like universities or union pension funds, arguing for social responsible investing makes more sense as you can achieve that much more easily than a donation to a social change organization.

(Has anyone done research on these issues???)