von | Jun 2, 2017

Factors to consider for socially responsible investing

Socially responsible investing criteria can include many different facets of a business—how they treat workers, how they treat shareholders—but perhaps the most important consideration is how they treat outsiders. Here is a breakdown of the factors to consider:

Supplier Relations

Socially responsible investors want to know that the companies they invest in have mutually beneficial and respectful relationships with their suppliers. They want to see that companies are working with high-quality suppliers that don’t cut corners and those suppliers are held to the same ethics standards the company holds itself to. It doesn’t do much good for a company to claim that it doesn’t use sweatshop labor if it buys merchandise from a supplier who does.

Some investors worry that powerful companies force suppliers’ prices down and don’t pay them fairly; other investors might argue that if a supplier agrees to do business, the relationship must benefit them, and that if it doesn’t, the supplier is free to exit the relationship as soon as any existing contracts expire.

According to the Domini Funds website, “Information on supplier contracts tends to be anecdotal and usually surfaces for a relatively limited number of corporations that are exceptional on either the upside or the downside.” Thus, investors may find themselves in the dark when it comes to a company’s relationships with the members of its supply chain. If this information is especially important to them, they can take an activist position and try to get companies to disclose this information.

Community Relations

Every company impacts the communities where it operates. The question is whether that impact is negative or positive. Often, it’s a combination of both. A new store might increase competition and give consumers lower-priced options, but it might take market shares away from existing businesses in the community. A new distribution center might create hundreds of jobs, but increase 18-wheeler traffic on local highways and roads.

Companies can make ethical decisions about the way that they operate to maximize positive effects, and minimize negative effects on the community. They can also make charitable contributions to the community by donating a portion of profits, doing volunteer work, sponsoring the local little league team or helping out with community fundraisers.

Government Interactions

Any company that is large enough to be publicly traded must comply with government regulations, from Securities and Exchange regulations to consumer safety regulations to environmental regulations and more. How the company chooses to behave in those interactions says a lot about the integrity of its managers and executives.

Some businesses lobby the government to win special treatment via subsidies, tax loopholes, regulatory loopholes and even regulations that punish competitors. Ethical investors must ask themselves if they want to profit from companies that lobby the government to help them earn their profits.

Financial journalist Charles Gasparino writes about a major instance of this problem in his book, “Bought and Paid For: The Unholy Alliance Between Barack Obama and Wall Street.” Not only did the government bailout a number of Wall Street firms during the financial crisis, but when federal, state and local governments borrow money, they turn to Wall Street firms, so it’s in Wall Street’s best interest for government debt levels to remain high, which leads to higher taxes. A socially responsible investor might want to avoid these firms.