Investing in an End to Poverty

“First, do no harm” is a treasured principle that applies in finances at least as well as in the medical profession.

Authors like Julie Clawson have brought this principle into the realm of daily financial life, showing us ways to love from afar. The maxim also needs to be brought into the realm of stocks and bonds.

In a world where money talks, people who care about justice have the chance to mix smart investing with collective corporate activism. As we steward our resources, we can be purposeful about supporting companies that are making wise and ethical decisions about the types of products and services they provide, the way they treat people and the environment.

As shoppers, we know we’re voting with our dollars as to the types of companies we want to support. So, we choose companies that don’t use sweatshop labor or we avoid blood diamonds or we buy American. But what about our role as investors? As investors, we’re part owners, and we vote with our 401(k)s and ROTHs.

I first started thinking about how the “do no harm” guideline applies to investing almost five years ago when I read an article in the Los Angeles Times about how the Bill and Melinda Gates Foundation has decided not to let their philanthropic goals affect their investment strategies and decisions.

As a result, in Nigeria, the Gates Foundation was funding polio vaccination projects with their charitable money literally down the road from with a cancer-causing oil plant that spews toxic fumes, a company supported by a portion of their endowment.

Last year, the Gates Foundation disbursed 8 percent of their money ($3 billion) to charitable projects. The other 92 percent of their endowment is invested to get more money to give away in the future. However, the LA Times estimates that a quarter ($9 billion) of the Gates Foundation endowment was invested in companies with practices that actually create the poverty that the foundation is trying to fix.

It’s pretty clear the Gates Foundation could do a better job making sure all their resources are aligned with their mission.

And so could all of us.

Poverty is produced. And, conversely, poverty can be prevented.

I studied a bit of systems theory in grad school, learning what I could about the behavior of complex systems. System dynamics says that you can predict a lot about the world by its structure and incentives, which combine in sometimes-unexpected ways. I became mildly obsessed with using system dynamics ideas to understand poverty production. Poverty production is the idea that poverty isn’t just “there,” it’s created by injustice, those systemic mechanisms that people develop—whether from sinister or negligent motives—to exploit the vulnerable, deny rights, boost inequality, separate families and maintain the status quo.

Poverty is produced. And, conversely, poverty can be prevented.

Businesses, like all of us, have an important role in these poverty processes. Companies make decisions all the time that create poverty or prevent poverty. Some companies make quality jobs available in low-income communities and others abuse their workers’ human rights. We see companies that dump toxic sludge and others that go out of their way to be responsible with the created world.

As I started to learn more about ethical investing, I wondered if others were already ahead of the game. But I found that, although most donate to charity, none of my friends and family are tuned into ethical investing. They didn’t know how to “do no harm.” They had no idea there was a way to avoid nasty companies and invest in those that are going the extra responsible mile.

Enter ethical investing (also called SRI for “socially responsible investing”).

Ethical mutual fund companies have done all the hard work of finding stocks that not only have good financial prospects but also have good record on social responsibility, their own internal governance policies, and the environmental sustainability of their work. It’s a two-stage process.

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The first part of their process is to eliminate the irresponsible companies. This means avoiding businesses that, for example, manufacture weapons or use exploitative child labor. These factors take companies off the list of fund potentials.

The second part of the process is to find the ethics stars. Starbucks giving health insurance to employees—that’s bonus points. Having low-footprint environmental policies and ethical supply chain policies—more bonus points.

There are more than 200 ethical funds that span the range of stock types. The SRI website is a good place to start exploring the specific funds you can choose from.

And don’t worry, financial returns for ethical funds are on par with regular stock funds (but you would invest ethically anyway, right?). When I think about it, it’s really not all that surprising that companies that consider long-term horizons such as those associated with the environment and those that have ethical employee relationships are going to perform well over the long term.

More importantly, ethical investing is making a difference. Business leaders have growing incentives to consider their ethics because they know more shareholders are banding together to evaluate those factors. And we’re rewarding companies that proactively do well and do good.

This is still a really dynamic arena. We desperately need more funds to become available in emerging markets where capital can help grow ethical companies and provide high quality jobs for people in developing countries.

But more than that, we still need a ton more people to commit to investing ethically. So, here’s your chance to find some funds that help you align your investments with your values, trade in your old ones and enjoy being an everyday human rights rockstar.

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