The following is a condensed, less academic excerpt of a paper I recently wrote for my final graduate course. It also represents the completion of Task #3 on my 9-Week Productivity Challenge and the beginning of a series of posts here on Earth and Money related the social and environmental impacts of our investments. The series began unofficially two weeks ago with a look at an emerging type of investment vehicle, community bonds.
Basic economics would dictate that public demand drives the success and failure of various enterprises. A company can only sell a product if someone desires it (though through good marketing, they can manufacture that desire as well). However, while average Canadians make greater strides towards environmental consciousness, they may be undoing their own efforts by bankrolling the very companies they are boycotting or attempting to avoid with their investments. In a nutshell, Canadians (and quite frankly, citizens worldwide) are funding their own demise by supporting companies which create unhealthy environments. This, in and of itself, is a major environmental health problem that has been grossly overlooked in the current environmental movement. When a consumer goes out of their way to purchase organic foods, what purpose does that serve if they have their money invested in companies that seek to produce unsustainable, pesticide-laced foods which only drive up the price of the very organic foods that they want to purchase?
The S&P/TSX Composite Index represents a list of 257 Canadian publicly-traded corporations that constitutes a market capitalization of 1,457 billion dollars. It forms the basis on which most Canadian equity mutual funds are founded. According to a 2008 Statistics Canada report, 60% of Canadian families held a registered retirement savings plan (RRSP), and 65-70% of those families are primarily invested in mutual funds, at a median amount of $25,000. It is frequently said that information is power and that an informed citizen has the power to make choices and decisions which can have a major impact on the ebbs and flows of society. However, in the case of the average Canadian, money may be more powerful than information. Most publicly traded companies rely heavily on the funding provided by the investment dollars of the average Canadian. Given this fact, it is unfortunate that most Canadians are not knowledgeable when it comes to their investments.
The very nature of mutual funds is that they exist so that the average investor does not have to pore over annual corporate reports and do their own research. A mutual fund exists so that individuals can hand their money over to a fund manager, pay a fee, and trust that their money is being invested wisely and according to their expectations. In exchange, fund managers provide very little specific information about their investments other than to list the top 10 companies in which they are invested, and the annual returns of the fund. Many fund managers, particularly those managing index funds, look to indices like the S&P/TSX Composite Index for guidance.
One would assume that stock market indices take corporate activities into account when deciding whether a company is included in the index or not however, in the case of the S&P/TSX Composite Index and most other indices, the reality is that those decisions are made solely based on four factors:
- Is the company listed on Toronto Stock Exchange (TSX)?
- Is the company incorporated in Canada?
- Does the stock maintain a minimum market capitalization? In other words, only the biggest companies make the index.
- Is the stock actively traded? In other words, stocks that are not regularly traded do not make the index.
None of these factors evaluate the relative success or failure of a company on any level – financial, social, ethical or environmental. It is left up to the mutual fund manager or individual investor (in essence, the market) to decide if a company is worth investing in. Given that most mutual funds invest in hundreds of companies, no single mutual fund manager can possibly evaluate every company for their environmental, ethical and social performance. And many do not perform particularly well in those areas. But regardless of the human rights and environmental infractions that companies incur, they remain in business in part because they are funded by the average Canadian. When asked if they knew that they were in fact supporting these corporate practices by investing in mutual funds, the average Canadian would likely answer with shock and appall. When asked if they would consider withdrawing their money and moving it to more responsible investments, the average Canadian would likely agree if they knew of an alternative. And therein lays the problem – the alternative is not apparent. As a result, the average Canadian investor is left invested in companies that may or may not agree with their values, and that may or may not be undoing all the positive efforts that they themselves incorporate into their daily lives.
But there are alternatives – community bonds are a great example, and in the coming weeks, I’ll explore some more ideas here on Earth and Money.Like What You See? Share the Story!
I think this will sound crazy, but I never really thought about investing in companies I actually believed in. Investing to me was always something you do through someone else (investor guys) and you just do what they say. LIke your post says, my wife and me do mostly mutual funds and we just let those guys handle it. But there are some companies that I hate, and it’s possible that they’ve got me invested in those companies! Nooooo! Taking a look into our investments now goes on our “To Do” list. 🙂
Well, I’m glad this post will encourage at least one person to take a second look at their investments 😀
To be honest, I was just like you for a long time – it never occurred to me to think about specifically what my investments were supporting.
This is a very interesting write-up. I’ve heard of special ETF’s and mutual funds that invest in special green initiatives or “good” companies. However, if their performance isn’t up to snuff, most people probably wouldn’t stick with them. That’s a shame….
MMD, that’s actually going to be the topic of a post next week – so-called “ethical mutual funds”. Stay tuned!
That really is the hard part – finding worthwhile investments that offer competitive returns but meet the values. Its not evident where to look for that and something I’m still trying to figure out.
I struggle with investing in companies that fully align with my values, since, there are few of them. Would it be nice to invest in a dominant solar energy company that pays lots of dividends? Absolutely. Do they exist – no.
Instead, I invest in Coca-Cola. KO is not unethical, but they are certainly a very capitalist organization.
The average Canadian is not knowledgeable when it comes to their investments since they don’t make the effort to understand. Many Canadians wouldn’t pay double the price for an order of pizza, yet they are willing to overpay thousands of dollars in mutual fund fees. I really don’t get it. I suspect if many Canadians understood the costs and lackluster performance of many of their investments, such as the majority of mutual funds, they would change their bad habits and learn more about where their money is invested.
The next question then is why don’t they exist? And how can we change the landscape so they do exist? That’s something I’d like to explore here eventually.
KO is not unethical? I would certainly disagree with that as the company continues to buy up water resources in third-world nations, depriving those in need of water so that Western civilization can continue to drink their precious soft drinks 🙂
But I agree with you wholeheartedly on the last statement.
I have to admit that I never actually thought about index investing this way. I explored the idea of investing in tobacco stocks a little while ago, but that was making a conscious choice to invest in a company I found unethical. I never thought that investing in an index essentially means I am supporting tobacco companies by default. One thing I realized while looking at the angle that I did is that it is extremely difficult to find a company that is completely ethical in every way.
Everyone’s definition of ethical is going to vary slightly as well. All we can do is make choices based on the information we hae and what we believe to be right and wrong.
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Community bonds… interesting idea. Not unlike Ithaca hours, at least in terms of community philosophy.
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