Socially Responsible Investing: Where’s Your Limit?

socially responsible investingThe reality is that, as investors, we make money from the success of American and international businesses. When Walmart sells groceries, investors benefit. When McDonald’s sells a Big Mac, investors benefit.

The effect of one sale is marginal. The effect of millions of sales leads to quarterly profits, which lead to dividends, and hopefully appreciation in a company’s stock.

But where should investors draw the line? At what point should investors question their benefit from the growth of a business or industry because the effect on humanity is questionable?

Profits vs. Conscience

Recently, we were all reminded of the devastating effects of firearms. The school shooting in Connecticut was nothing more than a tragedy. People were reminded that guns can be used for evil just as they can be used for good.

Investors are now divesting themselves from firearms companies. One private equity firm, Cerberus, announced that it would divest itself from Freedom Group, a company which made one of the firearms used in the recent shooting. Investors in the firm’s funds, which include unions, private investors, and global financial firms, have applauded the move.

On Wall Street, investors have also sold off popular gun stocks like Sturm, Ruger & Company (RGR) and Smith & Wesson Holding Corporation (SWHC), which are off 14.5% and 20%, respectively since the most recent shooting. While some investors are simply worried about new gun control measures, others simply cannot justify to themselves the idea of profiting from products that result in negative externalities.

Socially Responsible Investing: What Makes the Cut?

I’m interested in hearing your thoughts on which companies you are willing to invest in, and which you are not. Some other controversial industries include:

  • Private prisons – Are you willing to make money when more people spend more time locked up?
  • Alcohol companies – Millions of people responsibly enjoy alcohol, but many use it recklessly and dangerously, hurting themselves and others.
  • Casinos – Casinos make billions of dollars each year, which comes from fun-loving tourists and addicted gamblers alike. Are casinos an investment you can justify?
  • Tobacco Companies – One of the best performing stocks of all time, Altria, makes a product that ultimately leads to shorter life expectancies for those who use it.
  • Toxic Industry – Big industry leads to pollution. You can include any number of companies here – oil refiners and exploration companies, manufacturers, chemical producers, etc.
  • Weapons – Investing in guns can be a lucrative investment, but you need to realize what the weapons are used for – one thing only.

One could make the case that many of the best-performing publicly-traded companies make billions of dollars for themselves and their investors by creating negative outcomes.

Just think about companies like Monsanto, Exxon Mobil, and more.

All of the above companies are excluded from most socially responsible funds and typically trade at a discount because they are so-called “sin stocks,” companies that benefit from negative outcomes in one way or another.

I’m eager to hear from you. Where do you draw the line? Are there any industries or companies that you simply cannot invest in because you don’t like what their businesses do or how their products affect society as a whole?

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  1. says

    I try to draw the line although it gets tricky with wanting to do index investing. I really am against companies that have negative social or environmental impacts and I feel guilty investing in them. The sad reality is that even if I don’t invest in them someone else still will so things never change.

    • says

      Right, I think this is one of the hardest things to reconcile. Even if you don’t invest in them, someone will, and it’s not like those businesses won’t exist without someone owning their stock.

  2. says

    It can be a hard call to make where not to invest. Especially when you can bring up the debate of if it’s the product that’s “bad” or the way people use them. I try and look for companies that are upstanding and that are giving back to society. A few years ago I stepped away from investing in pretty much anything in the banking industry after all of the bailouts. I really did not want to put my money into their stock after a lot of their reckless behaviors resulted in them needing a bailout.

    • says

      I really feel like good things happen to good companies, so I know how you feel. Sometimes I find companies that meet all my quantitative metrics, but I feel like because of how they sell their product, or because of the quality of the product, that success is short-lived.

  3. says

    Snack food? Medical marijuana? Pharmaceuticals (ha)? Big energy? Payday loans?

    I don’t draw a line… if value investing is investing in companies which are undervalued for any reason, I don’t care if that reason is investors being ignorant what the numbers in a quarterly report actually mean, or if stocks are temporarily depressed due to media interest (see: tobacco, BP, guns today).

    • says

      No lines at all? You have to have some bias; you’re human!

      I kind of feel the same way. Although, I have my own biases too. Gun stocks? I own a gun and do not want to kill someone with it. So, I don’t see as much of the negatives that I would otherwise see. Those stocks are still off my radar, though, but for reasons other than what they are.

  4. says

    Tough call and those who make it I applaud them. I guess its about your values and what you believe but stocks like SWHC go up and down and people make money. When people are looking to invest and get a good return I think a lot of things go out the window. Invest in green energy and lose money or SWHC and make 20%? Playing devils advocate here but a lot of people who have money are more willing to cut ties since well, they have money. For people trying to get ahead they look for quicker wins which may not always be the best decision.

    • says

      I appreciate devil’s advocates – I like to play it, too. You raise a good point with some of the most socially responsible investments like solar companies being some of the world’s worst investments.

      I think you’re right about how much money you have playing into what you can invest in and filter out. I mean, with small amounts it only makes sense to index. With larger amounts it can make sense to carve out particular sectors or companies that you’re not very fond of.

  5. says

    When it comes to investing your number one objective is to make money (legally). As someone who believes in freedom these businesses exist because there is a demand for them. Nobody forces their product on any individual or family. For these reasons I have no reservations about what businesses I invest in.

  6. says

    Moral decisions are a tricky thing for investors, and sometimes have unintended consequences. “Clean” wind power is anything but, when factoring the pollution from rare earth mining and processing in China. “Organic” cotton from Pakistan may be free of chemical fertilizers and pesticides, but it is irrigated with fresh water resources that are rapidly being depleted.
    I must a sin investor through and through, since I hold shares in some of the industries that were cited in this article (alcohol, firearms, oil and gas, tobacco). I’m considering a casino, but I’d draw the line at private prisons.
    Another point: food stocks like Kraft and General Mills are rarely seen as questionably ethical, if at all. From a health perspective, nutrient-free sugary cereals, candy bars and any food products containing high-fructose corn syrup may be imposing as much or more health externalities as tobacco and alcohol products.

  7. says

    There are most definitely some companies – and industries, to be specific – where I wouldn’t want to directly invest my money. No question about it.

    That being said, with index funds (and managed funds, which I’m not a huge fan of due to fees impacting returns) it could be inevitable that you might be indirectly investing in a company or two that you wouldn’t invest in directly with individual stock. Though I’m sure that’s an easy one for many to rationalize, given the irrational behaviors of many investors :)

  8. says

    I’d have to say that I would not invest in most of the companies you mentioned because of the negative factors that are linked with them. It’s a personal choice. There are just some things I wouldn’t want to benefit from or even be associated with.

  9. says

    Personally, I don’t invest to make political statements. I may sell because I think new regulations will make a company unprofitable. I’ve yet to run into a strickly evil company-negative outcome company; even Montesano. (tabacco might be the exception, but even they have largely shifted businesses into new areas).

  10. says

    Far too often investing in only socially responsible companies does not garner the same rate of return as you would earn by not limiting yourself. I’m an investor to earn a profit and not stifle myself and my earnings.

  11. says

    While I have little problem owning any stock, people need to be aware of social responsibility. Comapnies that are irresponsible are more likely to face the music sooner or later, and I don’t want to have cash in a company that’s being punished in the share price.

  12. says

    I think the most important thing whether your investment can make sustainable profits. Whether it is Monsato, ExxonMobil or something else it is of no importance.

    Do not let morality obscure your vision to financial independence.

  13. says

    All of the types of companies you’ve listed above do make or promote products that have the potential to harm people, but do so passively for the most part (with the exception of tobacco perhaps). Where do you draw the line? There are thousands of people who die in car accidents every year, but is that going to stop you from investing in Ford? Interesting article and got me thinking.

  14. says

    You can’t use the argument that, “…if I don’t invest in such-and-such company, then someone else will”. First of all, if have ideals you invest to, who cares what someone else’s ideals are? Also, with that logic, then what about, “…if I don’t pick up this hooker, then someone else will”. :-)

  15. Andrew @ Listen Money Matters says

    That’s a really good point about questionable investments, I didn’t think about that. I think a good rule of thumb is to only invest in companies you truly believe in, it will prevent you from the “pigs get slaughtered” scenario and it will fit in nicely with your morals.

    How do you personally invest? I’m curious what tops your criteria beyond social responsibility.

    • says

      I’m all about profit, minimal debt, and wide moat companies. I like as close to a monopoly as a company can get, and then responsible management of the company.
      As such, I do own a lot of the companies mentioned above. No gambling companies, as there is no moat or uniqueness. But I like integrated oil companies, since they are going to exist as long as we have an oil based society.

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