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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