Investing with a conscious by allocating investment dollars to or away from businesses based on ethical, social, sustainability, or other factors has become increasingly popular over the last decade. Assets pursuing various flavors of these strategies are measured in the trillions of dollars and index providers have been busy manufacturing products for this cause.
A significant amount of research has been devoted to determining how these practices impact investment performance. In other words, does investing with a conscious impose a cost on investors via dampened performance or does karma end up rewarding them with better returns? Thus far, the findings on potential costs appear mixed. Notwithstanding, we believe there is a more important concern to be addressed: Do these conscientious investment policies sensibly target their intended purpose?
Unfortunately, I believe the answer is no. Leveraging one’s investment weight to vote for or against various corporate practices is a flawed strategy. In fact, this approach may actually foster precisely the opposite of what is actually intended. This article discusses a specific problem with these strategies and suggests one simple methodology to address it.