Bron
Alpha Architect
Socially responsible investing (SRI). Environmental, Social, and Governance investing (ESG). Impact investing…and so on… These socially responsible investing concepts can be roughly described as portfolio strategies that allocate investment dollars based on ethical, social, sustainability, or other factors. This form of investment has become increasingly popular over the last decade. Assets pursuing various flavors of these strategies are now measured in the trillions of dollars and index providers have been busy manufacturing products for this cause.
Many investors use their investment dollars to target corporate practices they find particularly favorable or unfavorable. However, I find many such efforts may backfire and result in precisely the opposite of what was intended. For example, one means of expressing one’s disapproval of a company’s corporate practices is to avoid purchasing that company’s shares. However, I find the majority of sin stocks listed on the NYSE tend to repurchase their shares. So lower share prices actually help these firms and their shareholders as it allows the firm to spend less money on buybacks and/or repurchase more shares at a lower price.
To date, I have not seen any press, research articles, or related discussions addressing this significant issue. This lack of consideration further supports my belief the investment industry is quick to tend to marketing demands of brokers and advisors rather than to performance and the needs of actual investors.
Fortunately, it appears there is a relatively straightforward solution. Index providers and practitioners pursuing such strategies can cross reference their lists of favorable and unfavorable companies with the corporate buyback activity of these firms to ensure their implementation of conscientious investing does supports or does not support the correct firms.
