I’m basically fine with investing in evil (2007)
blog.givewell.org
blog.givewell.org
Divestment by a well-respected organization like the Gates foundation is a signal to others: a signal that a particular industry is morally unappealing to a society, so much so that it's days are numbered. Thus, it's a bad investment, as likely you will lose capital in the very long term investing horizon.
If this sounds a bit circular, you're right! You're looking as an activist to start a spiral: first a few high profile, respected institutions signal that an industry is no longer acceptable to society, then all investors start to wonder about the viability, then all investors start pricing that risk into investment, then startup capital dries up, and eventually you see a slow decrease in power of a once dominant industry.
Generally that's a bit naive and simplistic, but you get the idea. Who on HN is willing to start a tobacco startup today in the US? No? Didn't think so :)
Or it might be seen as a signal that said industry might be full of undervalued stock, because a certain fraction of potential buyers opts out without even considering potential revenue and so on, lowering demand in the stock. If enough investors are following this heuristic (instead of actually analyzing the true potential of the companies in question), then high-visibility ethical divestment might even lead to a twisted amorality bubble.
For the tobacco example, I think it's the other way around: if (and only if) there is policy against an industry, then divestment will make that policy appear a lot more serious. But this signal would be even stronger when the divestment is done by "pure market rational" actors, that are not influenced by ethics (or that at least give the outside appearance thereof).
But a significant proportion of investors that won't touch a stock is going to have an impact, because even purely rational investors are going to consider the fundamentals of the business affected by the implied lower future liquidity, higher costs of capital and lower ability to retain senior executives with attractive equity offers in future. Even though that impact is unlikely to be large, it's probably large enough for firms keen to avoid being labelled "evil" by activist investors being encouraged to spend a bit more on CSR, tightening up their supply chain and abandoning an unpopular policy or two. It's that secondary effect of encouraging ordinary firms to be more ethically conscious - which GiveWell's article doesn't mention - that's the larger one.
A good analogy is democracy. A few people voting for a fringe candidate doesn't harm the mainstream candidates; awareness there's another party complicating the result might even boost the mainstream candidates' votes. As soon as the fringe party gains some sort of critical mass, however, one of the mainstream candidates is likely to start wooing their supporters by adopting one of their more inoffensive policies in some form.
They're rebranding nicotine addiction, cigarettes are uncool just like snuff and chewing tobacco became uncool.
Today's tobacco startups are in hookah. I also wonder whether India, for example, has any cigarette focused startups.
I think in reality regulation or the threat of it is what ultimately determines the fate of an unpleasant industry.
Meanwhile, an accelerator near you is funding cannabis startups. Not that I mind
So what you are saying that if Gates foundation stops investing in McDonalds, then in the long run people will stop eating fast food?
Because the idea that Gates foundation starting some kind of "movement of divestment" would have to be executed in secrecy form all of the "evil" investors who currently operate in the market. Otherwise these "evil" guys will reap profits of the obviously devalued stock and grow. And then they have bigger market share of all investment.
Further, economies of scale often cause local optima which don't exist for smaller companies. (Advertising, infrastructure, price) So, large but lean companies can easily hit downward spirals.
That said, this is really an edge case. A more common cause is conglomerates selling off lines of business which are then less stable on their own.
You'd be surprised: http://www.forbes.com/sites/freddiedawson/2015/06/30/e-cigs-...
(Keeping in mind that the nicotine in ejuice comes from tobacco...)
Edit: You'd said in the US, but that was just the first example that google gave me - lots of US discussion about it as well.
1. "It doesn't matter what I do -- If I don't do some particular evil, someone else will do that evil in my place" aka "I'm just one person, my vote is irrelevant"
2. "punishing past mishbehavior is not a deterrent to future misbehavior" (In this case, the punishment would be lowering the stock price of a company, by not buying its stock, which punishes the people who (gave money to people who... recursively) gave money to the founders.
Note that boycotts are different. A boycott directly takes money away from the target that would have been spent otherwise. This takes money away from someone who didn't take money away from someone etc. So you can endorse private boycotts of products but not private boycotts of stock.
The "standard arguments" are correct though. Your vote absolutely is irrelevant. And this is a thousand times more true in markets where people can make large sums of money by defecting.
And if you get past that, the stock price doesn't even affect the company. It's extraordinarily indirect. If you somehow make the stock price artificially low, that will somehow discourage future investors from investing in something similar? It seems unlikely.
> "It doesn't matter what I do -- If I don't do some particular evil, someone else will do that evil in my place" aka "I'm just one person, my vote is irrelevant"
These are different arguments. The second says, my actions don't have any effect. The first says, my actions affect the world, and also other people's actions, and their actions affect the world so as to cancel out the direct effects of my actions.
Reducing the first to the second misses a lot.
Hi! This is the Real World Fairy! If you think the real world perfectly conforms to the efficient market hypothesis, that violates obvious facts! There's a lot more to say because economics is complicated! The end!
The bigger issue for me is not that the long-term price impact of divesting is unpredictable (though that's true too). The issue for me is that divesting is a selfish action designed for the divesting party to benefit from the current price of the asset's stream of future cash flows.
By divesting in an oil company, say, you are realizing a cash gain roughly equal to the market's appraisal of the discounted stream of future cash flows of the company, per share. Instead of owning a piece of that oil company value in the form of a stock share, you've just converted it to dollar format. You still benefited (if you experienced capital gain on the asset) via the operation of that oil company, and if that company obtained value by inducing a negative externality on the world (say, pollution), some tiny slice of your cash from divesting is equal to the gain from that unpunished externality.
If you actually cared about rectifying the problem of the externality, you could instead give your shares away for free to the parties who are damaged by the externality.
If you think the oil company pollution will cause oceans to rise and will displace Gulf Coast families, you could give away your shares of Exxon to those at-risk coasters, paying the cost of your lost shares to subsidize their hedge against suffering the costs of some Exxon externality.
By divesting, all you would do is to fashion signal that you don't like Exxon.
Apart from some remarkable ability to forecast exactly when your divestment will cause a sustained price drop (which you don't have), divesting is sort of like holding up a sign that says "Honk if you don't like _____!" -- it's a fine thing to do conditioned on various goals or preferences, but is not near the highly optimal end of the spectrum of activist actions you could take.
Which is pretty much what's been happening to Big Tobacco. And it's compensation not prevention.
In tobacco's case, it isn't going to bring any dead people back to life.
I think most people, if asked, would say they'd prefer it if someone they loved hadn't died. Compensation can only go so far to fix that - just as getting the carbon industry to pay compensation won't un-flood any homes that are now underwater.
But this is only necessary because the so-called efficient, so-called market, so-called hypothesis is rhetorical bullshit - precisely because so-called market pricing is calculated in ways that exclude the true long-term costs of the external consequences of short term profit.
A genuinely efficient market would have to factor in the reality-based pricing consequences so that very bad effects became so financially unattractive they were prevented before they could happen.
Without that, you have a wealth extraction playground relying on political privilege to pretend to be something it very much isn't.
If parties possibly damaged by the externality are entitled to shares of any profit derived from that externality, it acts as an incentive for the company to derive profits in others ways. Rather than a class action that, as you correctly point out, merely gives victims compensation for damage done, it could be better to give potential victims some form of corporate governance.
This is all very hypothetical. The chances that an organization couldn't find some political maneuvers to dodge really paying for damages they cause are low. It would be like whack-a-mole. If you incentivize the company to steer away from ocean-raising pollution by letting potential coastal victims have some control, well then they'll just find some other group to extract profits from via unnoticed or unpunished victimization.
I'm not sure society wins by engaging in this game of whack-a-mole. The company keeps everyone distracted, the barriers for establishing class action results are high, it's inefficient for us to spend that much time and money on legal routes, and in the meantime, many bad actors simply get away with it and continue to extract profits and consumption opportunities at the expense of others.
This is one reason why I prefer to think about direct actions I can do that demonstrably help. Giving to Against Malaria definitely helps someone. Getting all wrapped up in long-term political advocacy for changing the entire framework in which publicly traded companies operate, so as to prevent them from extracting profits via unfair victimization ... that seems like a politics-is-the-mindkiller situation, which will probably do nothing but burn me out and prevent me from doing other things that actually could have helped.
Don't get me wrong. It's depressing that it's like this and doesn't bode well for moving towards a more egalitarian society (which I think would be better). But nonetheless it's just the world we live in, litany of Gendlin, yada yada yada.
These effects will typically be small, and in the case of a single person declining to invest in evil stocks they will typically be so small that it's obviously correct to ignore them completely. But if the EMH requires them to be zero, I'm not seeing why. Could you explain?
And, more to the point: the "predictable reasons" involve predicting how many people will be unwilling to hold the assets because of the evil. The more people who are thus unwilling, the higher the predictions will be in future and the lower the price of the asset will go. Your choice whether to hold the assets affects the prediction.
There's no Fortune 500 companies selling heroin, yet heroin suppliers get capital somewhere to run production facilities.
If the demand stays the same, it will get funded somehow, because there's profit to be made. I can respect the decision of any investor to not be a part of something they find morally repugnant, but let's not pretend like that's going to cause the demand for the morally repugnant thing to disappear.
Oxycontin though.
The irony is that individual company selection has an overall negative impact on foundation funds' returns. Asset allocation (beta) is so much more important than security selection (alpha) that it explains more than 100% of funds' returns.
- "How do you want your pension fund invested?"
- "Weapons would be good"
- "Sorry, we can't morally justify that"
Well why not? The only that that's happing now is that people who aren't me will be making a profit on those stocks. If running a munitions company is legal, then it shouldn't be morally wrong for my pension to be invested in it.
There's also an argument (which I think applies to the fossil fuel divestment movement) that having money invested in those industries makes it harder for organisations to speak out against fossil fuels as someone somewhere will be accounting for how that impacts your bottom line negatively. By pre-emptively removing the money, you have more chance of making something illegal (or just heavily, punitively taxed) in the future.
Except money isn't actually removed. It's just the money of ordinary people, that is removed. Hedge funds, banks and rich people are still invested in munitions, tobacco, alcohol and fossil fuels. The rest of us for some reason forced to be "better" people, poorer, but better.
And don't kind yourself, weapons aren't going anywhere. The US army isn't going to disband because the middle class decides that their pensions won't be invested in Raytheon. It's absolutely bonkers that it's okay for me to want my country to have an army, but morally wrong for me to want to profit from the purchases that army might make.
That would sound like a good country to start another pension company if I didn't know the difference between theoretical free market idea and real life.
At a slightly more cynical level, maybe they realize that making money from morally wrong investments is bad for business in the long run. I'm also cool with that: That tells me Danish society is keeping "wild" capitalism under control. Of course, that might not be great from a "me above everyone else" mentality, but I think I'm not the only one cool with that.
The problem is I'd like a program where I get 100% of my KWh from the 0.75 cent/KWh "local" nuke plant instead of stinky coal. Where's my "green glow energy" program that drops my electric bill by 50%?
[0] "The Industrial Revolutionaries: The Making of the Modern World 1776-1914" Gavin Weightman [1] The book quotes Karl Marx "Without slavery, no cotton; without cotton, no modern industry"
Holden Karnofsky | Co-Founder and Co-Executive Director. Holden graduated from Harvard University in 2003 with a degree in Social Studies, and spent the next several years in the hedge fund industry. He co-founded GiveWell in mid-2007.
Divestment of evil companies drives down their valuations; consequently, those who invest in evil can actually earn greater returns. If those evil companies are not raising capital, their operations are unaffected. It's simple but widely misunderstood.