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Posted by on Aug 1, 2017 in Featured, Investment Perspective, Market Insight

Do You Want to be Socially Responsible?

Do You Want to be Socially Responsible?

By Dan Ahrens, chief operating officer of AdvisorShares

The question of social responsibility should be easy to answer for any normal, level-headed human being. On the surface, we should all want to be socially responsible. But what does that mean? In actuality, it’s quite complicated. Social responsibility can mean a lot of different things to different people. Socially Responsible Investing (SRI) is obviously only one small piece of overall social responsibility, but when it comes to investing, the term “socially responsible” can be a huge can of worms.

The Good: Thankfully, in recent years “impact investing” and “sustainable investing” have become more popular concepts. I am a big proponent of impact investing and sustainable investing, which involve positive screening – meaning they seek out investments that fit a certain investment mandate for potential financial performance AND for certain social aspects. Again, these can mean different things to different people, but it often means seeking out companies such as those involved in or practicing renewable energy, positive environmental practices, charitable or educational programs, healthy foods, employment practices that promote equality, and good corporate governance in general. Additionally, I believe people should always look to make an impact with time and money. Individuals and companies should donate money and goods to charitable organizations that they believe in. They should also spend time and effort on causes that can have a positive influence on areas of need.

The Bad:  Let’s get back to the problem that I called “a can of worms.” I’ve talked to investors who put money into an SRI fund because they believe in social responsibility in general, or in recycling, or global warming or woman’s rights. I’ve also heard of people that invested in SRI just because they are against corporate greed, excessive executive pay, unfair labor practices or pollution. All of these things should be thought of as good and noble causes. But many of these same people enjoy having a good glass of wine, beer, or a cocktail. Some are smokers. They may also enjoy the occasional casino, racetrack, or simply the buying of lottery tickets. I propose that many SRI fund investors have no idea what they are actually investing in.

Most of the largest SRI funds are indexed-based funds that use a concept called negative screening. That means they screen out certain types of companies they’ve deemed as not socially responsible. That sounds kind of harsh. What are the main types of companies they screen out? Alcohol, tobacco, casinos and gaming, weapons manufacturers (defense contractors), and energy companies. But wait – don’t most Americans think it’s OK to drink (in moderation)? Don’t most people think it’s OK to have a weekend at the casino or to buy lottery tickets? Many SRI investors think they want to “do well by doing good” with their investing, without realizing they are simply doing nothing more than “boycotting” alcohol, gaming, tobacco and similar types of stocks – even though they enjoy life and sometimes drink and gamble (and some smoke). By the way, I think alcohol, tobacco and gaming make for very good investments. Simply look at virtually any 5, 10, or 20 year chart.

Another problem with that SRI fund? Once so-called “sin stocks” are removed, an investor will still own everything else – some big wall street banks, some companies that pollute, some companies that underpay women, some companies that discriminate, some companies that serve very unhealthy food. Should one feel socially responsible then?

The AlphaBaskets blog provides frequent market insight and commentary by AdvisorShares Investments, LLC, created by AdvisorShares and other leading active managers.  AdvisorShares Investments is an SEC-registered investment adviser and the investment adviser to the AdvisorShares actively managed ETFs. The views expressed on AlphaBaskets should not be taken as investment advice or a recommendation for any of the actively managed ETFs advised by AdvisorShares.