Doing Good by Investing in Sin

The recent growth in ethically and socially responsible funds now represents trillions of dollars of mandates. Many of these funds engage in negative screening – excluding investments that are involved in activities that are considered unethical or socially irresponsible such as defence, guns, alcohol, tobacco, adult entertainment, gambling, nuclear energy and, most recently, fossil fuels. The argument of the sellers of these funds is that investing ethically with them will make the world a better place. Many of these funds tell their investors that it will be a “win-win” situation: you are “doing good” and you also create “alpha”, i.e. you beat the market. Their argument is that the market undervalues the long-term negative consequences of being involved in socially irresponsible activities. Fund managers are now, for example, asked to incorporate climate change risk in their investment process.