After spending a few days in Toronto, I couldn’t help but engage in some lively discussions with a couple investment-banker type friends of mine about the ethics of investing. We went back and forth a few times about who decides what stocks to buy, how that decision is made, and what ethical framework those decisions are made in. I will outline what I believe to be the way stocks are bought and sold by fund managers, and then discuss why I think one should be more considerate with their investments.

1. Fund managers operate under a mandate, making buying and selling decisions based on that mandate
2. The mandate is set out by whomever the money belongs to
3. That mandate is usually “make money”, and does not include an ethical framework under which to make buying decisions
4. Fund managers analyze a stock’s value, and if they believe it is undervalued in the market place, based on financial statements an such, they will buy some of that stock
5. If the mandate the fund manager is working under only says “make money”, the fund manager would be going against the mandate if he chose to not purchase a stock for ethical reasons

Why does this matter? Well, by my rudimentary understanding of finance, the more demand a company’s stock is in, the lower the cost of capital is for that company. The lower the cost of capital, the more competitive and able to expand that company will be. Therefore, especially when buying large quantities of stock, by buying a company’s stock, you are not only attempting to make money for yourself, but you are helping that company grow and be successful.

What do I mean when I say buying stocks based on ethics? Well, if one was to buy stocks in a company that produces tidal power stations, we would not only be trying to make money, but we would be supporting a company that is helping to provide alternatives to fossil fuels. If, on the other hand, we were to buy stocks in Monsanto, we would be supporting a company that bribes government officials, falsifies scientific documents, knowingly pollutes water supplies, and sues hundreds of farmers for collecting their own seeds. It is true that Monsanto stock has doubled in the last year, but is the money that could be made from the increase in stock price worth being partially responsible for catastrophic environmental damage?

A common excuse for corporate misconduct is that the CEO was trying to increase shareholder value. If you were a shareholder when any misconduct occurred, the CEO would have been working on your behalf. That essentially means that if you hold stocks in Monsanto, or any other corporation that engages in criminal activity, you are ethically an accessory.

One argument is that it is not industry’s place to regulate their own ethical activity, that is the role of the government. However, our government is scaling back on regulation in favour of privatization (for example, the privatization of the Canadian Food Inspection Agency). Whats more, the Canadian government fully supports the actions of Monsanto, regularly promoting their GE foods. We cannot wait for the government to act on our behalf, we have to act ourselves instead.

My advice: when considering an investment, find out what that company does and be sure you support it. Create a set of ethical criteria for your RRSP manager, and know what is in your portfolio. You might even want to choose a financial institution that has ethical criteria for accepting clients (.pdf), and invests in companies it deems to be having a positive impact (such as Vancouver City Savings). You don’t have to sacrifice making money, just make sure you are not accidentally supporting a company you have morally opposition to through your investments.