Are social/responsible stock funds pointless? [duplicate]

Question

The ESG funds are becoming more and more popular. (ESG = Environmental, Social and Governance). But I am wondering if it makes sense for stock funds?

If you buy a stock fund, the only consequence is that you become a player on the stock market, but your money will not transfered to any "bad" company in the stock fund. So why should I care about the portfolio of the fund?

Clearly, if you buy a fund that includes corporate bonds, then you finance companies, i.e. you could finance, e.g., weapons or child labor. In this case ESG funds are very useful.

But for pure stock funds, what is the point with ESG?

Edit: This question is very similar to the question "if buying a stock means to support the company". However, one difference is, e.g., that if you buy a fund you can not participate at a annual general meeting and you are not a legal shareholder of the companies. So with a stock fund you are only a speculator but with a stock you are also a owner. So it could be a reasonable and responsible strategy to select stock funds according to risk/profit and to select bonds (or other assets that directly support the company) by ESG criteria. In this way one could transfer money from non-ESG companies to ESG-companies.

Edit2: All funds I have are ESG funds. But I was wondering if this has any positive impact. This is why I asked this question. So please don't downgrade my question to tell me that I am irresponsible or ignorant. This is not the case.

Answer 1

It's not just about the ethics of investing in these companies. What if you believe (either hypothetically or with supporting evidence) that companies that show good environmental and social citizenship will tend to perform better that those that do not? Then you would consider a fund that is based off of high ESG ratings to be a good investment.

The bottom line is - these funds exist because there is a market for them. Whether the motivation is ethical, financial, or something else, and regardless of the actual impact on the companies that make up the index, there is a market for these funds.

Answer 2

If you hold a stock in a company you stand to benefit directly from the activities of the company via dividends or stock buy backs. You also benefit indirectly from the company's profitability. The stock price of a company will tend to be correlated with its profitability, since there will be more demand for the stock in attempt to capture a slice of the profits.

Some people don't want to personally benefit from activities they consider harmful to the larger world. Other people want to avoid charges of hypocrisy: that they personally benefit from actions they condemn in others.

Answer 3

Owning stock (and owning a fund which owns stock is owning stock as far as I'm concerned) directly gives power to a company. As a result of your ownership of the company (or, of your ownership of the fund, and its ownership of the company), the company's stock price increases (due to higher demand), and thus the company is able to:

• Sell additional shares of the company at that higher price
• Borrow more money at a lower rate due to the higher market capitalization
• Leverage its stock price to purchase other companies at a lower effective price
• Argue that it should continue behaving in the manner that it does as a result of the increasing stock price

Further, while you are not participating in board elections directly, the presumption is that the ESG fund will advocate for environmental and social good behavior when it votes the shares that you indirectly own. Most funds will have that written into their charter directly (and if that matters to you, that should be something you specifically target).

As such, buying ESG funds increases the power of "good" companies, and decreases the power of "bad" companies. Unless you have a lot of money, it's not going to do either of those things very much, but of course one of the points of such funds is to collect small amounts of money from large numbers of people and thus accomplish good. Whether you choose to presumably give up a small amount of your potential earnings in exchange for this small amount of good (in addition to the other stated benefits, such as knowing your income is coming from "good" and not "bad" sources), is of course your choice.

Answer 4

Remember that funds are backed by actual stocks. It might not give you access to the general meeting of the companies, but when you buy into EvilFund, they go out and buys evil-stocks for the money. This again increases the value of those companies (slightly), enabling them to e.g. borrow more. If the price of evil-stocks started plummeting their boards of directors would probably start demanding a change (since they see their possessions fall in value). In that way you, by buying EvilFund which buys evil-stock, helps holding their stock-prices up and their boards of directors happy with their evil ways.

Answer 5

Unless you're extremely wealthy, the fact that you can't participate in investor meetings of stocks you own indirectly through a fund is hardly an issue. Most direct investors have little influence on the actions of the company, because they rarely own enough of the company to make a difference? How often do you hear of shareholder proposals that were opposed by the Board of Directors getting passed? As a practical matter, only the major shareholders have any real control over the company, the rest of us are just along for the ride.

So rather than worrying about your voting ability, think about the flow of money. Institutional investors, such as mutual funds, make up the vast majority of stock ownership (about 75% is in retirement accounts and other tax-free accounts like 529 college savings plans -- see Who Actually Owns the Stock Market). So these funds have a big impact on the companies they choose to invest, or not invest, in.

Of course, your personal choice of mutual fund has about as little impact as your shareholder vote in direct stock ownership. But imagine if lots of other people feel the same way as you do, and all choose socially-conscious funds. That could shift a significant amount of investment capital to those companies, and put pressure on other companies to change their practices.

It's kind of similar to a boycott. A company can easily ignore a few individuals who decide to stop buying their products, but if there's an organized movement it's harder to brush off.

In both cases, you can't really be sure how many other people will act like you do. But you don't have any control over their decisions, only your own. So you act according to your conscience, and hope that there are enough others that it will make a difference. If everyone just gives up because they think their action won't make a difference, it's a self-fulfilling prophecy.