Author Topic: Are index funds unethical?  (Read 3169 times)

Mellabella

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Are index funds unethical?
« on: September 21, 2019, 03:57:21 AM »
Hi guys,

I went to the climate change protests in my city yesterday & felt a bit guilty for my vanguard index funds sponsoring oil & gas companies spouting fossil fuels. Iím sure there are some good companies in there too & could sponsor renewable energy one day but it did make me think. Pretty new to all this so forgive my ignorance. Has MMM written about this at all? Does anyone have similar thoughts?

terran

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Re: Are index funds unethical?
« Reply #1 on: September 21, 2019, 06:11:05 AM »
Here's a response I gave to a similar question (found here).

Investing in a company does not mean you're giving money to that company, so the best you can hope for by not investing in a company is to have some small downward effect on the stock price. That does reflect poorly on the company's management and they have to defend why their stock price is lower, but at the same time it means that the people who do invest in the company actually make more money as they have to pay less for the same earnings. In other words, you'll pay a premium for investing only in companies you agree with, while people without your morals (or different morals) will receive that premium for their willingness to invest in those companies.

You'll also pay an additional premium in that index funds with a social agenda have to be a little more active than regular index funds in that someone needs to select what is eligible for inclusion, and they're less popular so they'll have a higher expense ratio than a regular all market tracker. You also have to consider whether the morals of the social index match your own. To be 100% true to your morals you may have to invest in individual stocks and as we all know (or if not, you can find many many threads on the topic), this is almost always suboptimal.

One suggestion I've seen in threads like this is to just invest in a regular all market index tracker, then with the extra money you'll have you can choose to donate that to causes you believe in.

MDM

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Re: Are index funds unethical?
« Reply #2 on: September 21, 2019, 08:59:24 AM »
In the sense that someone somewhere probably disagrees with the practices of one or more of the companies comprising an index, sure.

Different people will disagree with different companies' practices, so taken to the extreme nobody would invest in a total market index.  But that would indeed be extreme....

terran's "just invest in a regular all market index tracker, then with the extra money you'll have you can choose to donate that to causes you believe in" seems a reasonable path.

maizeman

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Re: Are index funds unethical?
« Reply #3 on: September 21, 2019, 10:01:57 AM »
Another vote for terran's approach. Index funds advertised as ethical/socially responsible tend to lag the overall index by about 0.5 to 1%/year through a combination of higher fees and lower returns. Since owning the stock of a given company doesn't do anything to directly enrich that company or give it more resources, I think it is possible to achieve more of the change you seek to make in the world by owning complete index funds and donating 0.5 to 1% of your net worth/year to organizations seeking to achieve the changes you seek to make in the world.

Here's an old thread on the same topic if you'd like to read more and get exposed to a wider range of views on the topic: https://forum.mrmoneymustache.com/investor-alley/ethical-implications-of-index-fund-investing/

undercover

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Re: Are index funds unethical?
« Reply #4 on: September 21, 2019, 12:01:45 PM »
I guess the unethical part is not that you're giving them money, it's that you're partaking in receiving some of the profits.

But that's something you absolutely can't control. You've already done the best you can do by participating in one of the few rights we have and it would be pretty short-sighted to forego retirement because a minuscule part of your investment returns came from fracking.

More harm is definitely done by buying gas at the pump than investing in index funds by a long shot. What are you going to do, just not drive because the government refuses to enact policies that would directly reduce carbon emissions. It's largely out of your control. Oil companies aren't ever going to stop even if they had a crystal ball that predicts the future 100% accurately.

Laserjet3051

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Re: Are index funds unethical?
« Reply #5 on: September 21, 2019, 02:35:53 PM »
to not be a hypocrite, i no longer use any gas, oil, or electric based modes of transportation. i also no longer cook using gas or oil based energy, so raw vegan only. i realize that my clothes used to be made by factories that consume fossil fuels, so 100% 24/7 nudism it is. We have also moved into a cave in our nearby forest.

Mellabella

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Re: Are index funds unethical?
« Reply #6 on: September 21, 2019, 10:32:03 PM »
Laserjet: I laughed at your post. Thatís how I feel sometimes though! Like nothing I do will ever be enough & then I end up either doing nothing or screwing myself over

Maizeman could you please explain this a bit more:
ďSince owning the stock of a given company doesn't do anything to directly enrich that company or give it more resources...Ē

I will have a look at the link to tue other post you sent as well.

Undercover: Yes! We canít be perfect (although we can do some pretty simple things) but really I think campaigning the government is the most effective route.

MDM: I am mostly interested in the environmental impacts but I agree with your point. Hopefully as renewable energy demand grows we will be seeing more of those companies rise to the top.

maizeman

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Re: Are index funds unethical?
« Reply #7 on: September 21, 2019, 10:45:19 PM »
Maizeman could you please explain this a bit more:
ďSince owning the stock of a given company doesn't do anything to directly enrich that company or give it more resources...Ē

Many folks new to investing assume they if you buy a share of Exxon for $80, that those $80 go directly to that company and are used to fund new oil drilling or what have you. In reality you are buying your shares from some other investor, so the money you put into index funds doesn't go to the companies you are investing in, it goes to people who are disinvesting in those same companies.

Now having a market for a companies securities does provide some benefits to that company. It's just neither that direct, nor does Exxon receive anywhere close to $80 in benefit from someone buying one of their shares at $80.

seattlecyclone

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Re: Are index funds unethical?
« Reply #8 on: September 21, 2019, 10:59:45 PM »
Maizeman could you please explain this a bit more:
ďSince owning the stock of a given company doesn't do anything to directly enrich that company or give it more resources...Ē

Consider a Ford truck. The first person who buys that truck gives Ford money for that truck. Subsequent sales of that truck don't have any direct effect on Ford's bottom line. When you buy a used truck you pay the previous owner for that truck, not Ford.

Stocks basically work the same way. When a company has an initial public offering (IPO), or a subsequent public offering, they're selling new shares directly to the public. These transactions represent a small fraction of the stock sales that occur. In general the stock market trades "used stock." If you're not participating in an IPO (and you'd know it if you were), the money you pay for your stock goes to the previous owner and not to the corporation behind the stock.

Leisured

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Re: Are index funds unethical?
« Reply #9 on: September 22, 2019, 01:47:10 AM »
Excellent analogy seattlecyclone. +1

Mellabella

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Re: Are index funds unethical?
« Reply #10 on: September 22, 2019, 05:16:46 AM »
Ooh I see! Thankyou maizeman & Yes that was a very helpful analogy seattlecyclone! :)

AccidentialMustache

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Re: Are index funds unethical?
« Reply #11 on: September 22, 2019, 06:11:15 AM »
A share of the company isn't unethical if you use your ownership to pressure the company into coming in line with the ethics you want them to observe. This is going to be more difficult in an index, but realistically, individually owned shares are so small you aren't making much of a dent either.

What it might mean is an opportunity for someone to create an activist whole-market index where there's a guiding principals directing how it as a shareholder votes. E.g., climate change, equal pay, etc.

marble_faun

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Re: Are index funds unethical?
« Reply #12 on: September 22, 2019, 07:14:58 AM »
I thought a lot about this when we were first getting into index funds.  (Also realizing that we'd have the same issues with 401K's or other types of retirement investments.) 

I do feel coerced into alliance with companies that are wrecking our world, and into an overall economic system that has a lot of cruelty built into it.

You either hitch yourself to the wagon of stocks/investments, or face an old age of poverty, since un-invested savings will lose value with inflation.  There just aren't a lot of other great options in our society.

This may be a controversial or unwelcome view, but I won't lie, I do feel guilt.  Ultimately I hope that I can live a good life in other ways that make up for it. 

maizeman

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Re: Are index funds unethical?
« Reply #13 on: September 22, 2019, 07:38:23 AM »
Wow, that is by far the clearest way of explaining it I've heard @seattlecyclone !

I do feel coerced into alliance with companies that are wrecking our world, and into an overall economic system that has a lot of cruelty built into it.

You either hitch yourself to the wagon of stocks/investments, or face an old age of poverty, since un-invested savings will lose value with inflation.  There just aren't a lot of other great options in our society.

While I don't think it is as cut and dried as that (see discussions above) since you do surely there are options open to you beyond alliances with companies that are wrecking the world and leaving your money in the bank to lose value to inflation?

What about investing in individual stocks of companies with strong ethical track records? An investment account split between, say, Patagonia, the Dr. Pepper/Snapple Group, and Etsy and a half dozen other similar companies is going to be way more volatile and risky than one invested in index funds, but still will almost certainly outperform cash over the super long run.

Or if that doesn't sound good, what about buying and renting out some real estate? Significantly more hands on than index fund investing but still far better long term prospects than letting money simply pile up in a bank account.

undercover

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Re: Are index funds unethical?
« Reply #14 on: September 22, 2019, 09:28:50 AM »
^ I agree, but they did mention "there just aren't a lot of other great options in our society."

I don't consider investing in individual stocks or real estate as great options given the data and/or the amount of work involved.

I think one just has to accept that humanity is humanity, no one individual or group is isolated from the larger whole, and "good" and "evil" do not necessarily exist. On the flip-side, investing in index funds may be the most ethical thing you can do because as a whole we are living much better lives than we were one hundred years ago and it's due to the collective effort of all the companies and government involved. Good wouldn't exist if bad didn't.

maizeman

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Re: Are index funds unethical?
« Reply #15 on: September 22, 2019, 09:37:01 AM »
Good point undercover. The way I read it, it sounded like those other options were worse than either index funds OR letting money be eroded by inflation in the bank. But now that you point it out, I can see how it could be read to just be that those option options were worse than investing in index funds (which makes more sense).

Sorry if I misread you marble_faun.

Gremlin

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Re: Are index funds unethical?
« Reply #16 on: September 22, 2019, 05:42:45 PM »
In Australia, at least, Vanguard have an Ethically Conscious International ETF with the same MER as the "full" international ETF.

For my domestic equities, I constructed my own theoretical "ethically conscious market" (basically looking at the ASX300 less any companies that I'd determined to not fit the bill).  Every time I went to add more to domestic equities I'd buy the stock that got my portfolio to look most like the market.  There was a bit of spreadsheet work to set up, but now it pretty much looks after itself.  In the first couple of years it looked a bit like stock picking, but now it's pretty much in line with "my" market.

Whilst I get the primary vs secondary market argument, it still didn't feel right to me that I was profiting from the destruction of the planet.

WhiteTrashCash

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Re: Are index funds unethical?
« Reply #17 on: September 22, 2019, 06:03:45 PM »
My feeling on the subject is that individuals really don't make a difference one way or another with these sorts of issues. Only government policy makes a difference and you can dictate government policy by changing the way you vote or persuading other people to change their votes. Other than that, all you are going to do is stress yourself out needlessly.

fattest_foot

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Re: Are index funds unethical?
« Reply #18 on: September 22, 2019, 07:08:09 PM »
to not be a hypocrite, i no longer use any gas, oil, or electric based modes of transportation. i also no longer cook using gas or oil based energy, so raw vegan only. i realize that my clothes used to be made by factories that consume fossil fuels, so 100% 24/7 nudism it is. We have also moved into a cave in our nearby forest.

I'm not sure why oil and gas companies were singled out. What exactly are they doing that's unethical?

If anything, I'd be more upset with owning the Facebooks, Googles, and Apples of the market. I like money a lot more than I care about them selling out their customer's privacy though.

seattlecyclone

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Re: Are index funds unethical?
« Reply #19 on: September 22, 2019, 07:57:11 PM »
to not be a hypocrite, i no longer use any gas, oil, or electric based modes of transportation. i also no longer cook using gas or oil based energy, so raw vegan only. i realize that my clothes used to be made by factories that consume fossil fuels, so 100% 24/7 nudism it is. We have also moved into a cave in our nearby forest.

I'm not sure why oil and gas companies were singled out. What exactly are they doing that's unethical?

I mean, there is that whole climate change thing caused in large part by the burning of fossil fuels. That's why a bunch of folks are interested in doing what they can to hurt the oil companies.

However I'm personally of the opinion that if we're looking for a good scapegoat we should look into who's burning the fossil fuels. Merely digging fuels up from the ground isn't what got us into this mess, but it's easier to blame the oil companies because then we don't have to consider the role that our own behavior has played (and continues to play) in the climate crisis.

Laserjet3051

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Re: Are index funds unethical?
« Reply #20 on: September 23, 2019, 12:23:39 PM »
to not be a hypocrite, i no longer use any gas, oil, or electric based modes of transportation. i also no longer cook using gas or oil based energy, so raw vegan only. i realize that my clothes used to be made by factories that consume fossil fuels, so 100% 24/7 nudism it is. We have also moved into a cave in our nearby forest.

I'm not sure why oil and gas companies were singled out. What exactly are they doing that's unethical?

I mean, there is that whole climate change thing caused in large part by the burning of fossil fuels. That's why a bunch of folks are interested in doing what they can to hurt the oil companies.

However I'm personally of the opinion that if we're looking for a good scapegoat we should look into who's burning the fossil fuels. Merely digging fuels up from the ground isn't what got us into this mess, but it's easier to blame the oil companies because then we don't have to consider the role that our own behavior has played (and continues to play) in the climate crisis.

BINGO!

Davnasty

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Re: Are index funds unethical?
« Reply #21 on: September 23, 2019, 01:09:53 PM »
to not be a hypocrite, i no longer use any gas, oil, or electric based modes of transportation. i also no longer cook using gas or oil based energy, so raw vegan only. i realize that my clothes used to be made by factories that consume fossil fuels, so 100% 24/7 nudism it is. We have also moved into a cave in our nearby forest.

I'm not sure why oil and gas companies were singled out. What exactly are they doing that's unethical?

I mean, there is that whole climate change thing caused in large part by the burning of fossil fuels. That's why a bunch of folks are interested in doing what they can to hurt the oil companies.

However I'm personally of the opinion that if we're looking for a good scapegoat we should look into who's burning the fossil fuels. Merely digging fuels up from the ground isn't what got us into this mess, but it's easier to blame the oil companies because then we don't have to consider the role that our own behavior has played (and continues to play) in the climate crisis.

Both parties share responsibility in my opinion. It's true that if no one used fossil fuels, the problem wouldn't exist. On the other hand, you can't expect every individual to have the information and intelligence to fully understand the consequences of their actions. To remedy this you might expect the government and publicly funded research to educate the population, but that's where (one example of) the unethical behavior of the companies sourcing and distributing fossil fuels comes in. Industry lobbyists and the politicians who work with them play an active role in misleading the public and also in designing a society which expects and encourages consumption of fossil fuels and the products derived from their use.

But I think that's mostly beside the point in this discussion. I agree with others who have pointed out that buying index funds is such an indirect benefit to the individual companies that it's almost irrelevant. If you feel guilt, donating the delta between a broad index fund and a "socially responsible" one would be more effective than investing in the inferior fund.

TomTX

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Re: Are index funds unethical?
« Reply #22 on: September 23, 2019, 03:31:16 PM »
Another vote for terran's approach. Index funds advertised as ethical/socially responsible tend to lag the overall index by about 0.5 to 1%/year through a combination of higher fees and lower returns. Since owning the stock of a given company doesn't do anything to directly enrich that company or give it more resources, I think it is possible to achieve more of the change you seek to make in the world by owning complete index funds and donating 0.5 to 1% of your net worth/year to organizations seeking to achieve the changes you seek to make in the world.

Yeah, that analysis is outdated - or maybe just wrong. I dunno where Swedroe pulled his numbers - I first went to Google*, then to Vanguard comparison directly and got the same answer. The other two of his examples have ridiculous expense ratios, so I stuck with the Vanguard example he used:

Social investing (VFTNX vs VFINX) has a notably higher return on the 1, 3, 5 and 10 year timeframes. Across the board, social investing "won" a better return. On the 10 year, it's just over 1% better.

https://advisors.vanguard.com/web/c1/compare-products/?FundId1=VFTNX

Personally, I don't want to own fossil fuel companies. I also needed to diversify internationally (I've been pondering this part for years) - rewrote my IPS, sold the VTI and went all-in on Vanguard ESG ETFs.

https://institutional.vanguard.com/VGApp/iip/site/institutional/researchcommentary/article/NewsInstInfo092018

I have already been working to reduce impact on a personal and family level for a long time.

Is Vanugard ESG investing perfect? Nope. Neither is my lifestyle. But I believe they are both notably better than the status quo.** Reasonable first approximations.

*Google benchmark available was vs a generic S&P500, not Vanguard specifically. Same answer.

**The status is NOT quo! ;)
« Last Edit: September 23, 2019, 03:38:24 PM by TomTX »

TomTX

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Re: Are index funds unethical?
« Reply #23 on: September 23, 2019, 03:34:56 PM »
I mean, there is that whole climate change thing caused in large part by the burning of fossil fuels. That's why a bunch of folks are interested in doing what they can to hurt the oil companies.

However I'm personally of the opinion that if we're looking for a good scapegoat we should look into who's burning the fossil fuels. Merely digging fuels up from the ground isn't what got us into this mess, but it's easier to blame the oil companies because then we don't have to consider the role that our own behavior has played (and continues to play) in the climate crisis.

The fossil fuel companies have financed the "denier" movement with fake grassroots organizations ("astroturfing"), paid "research", lobbying etc specifically to delay action on climate change. They have been doing this for many decades.

The Koch brothers alone are documented as funding ~100 different organizations to push their lies about fossil fuels and the effect on the environment.

Because delaying action by one day gets the fossil industry $5 Billion. One day.

TomTX

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Re: Are index funds unethical?
« Reply #24 on: September 23, 2019, 03:35:03 PM »
Excellent analogy seattlecyclone. +1

It is a good example. Effects on Ford would be indirect, but if the secondary market for Ford trucks dropped out, it would definitely impact Ford - as an example, the lease market would die, because they rely on residual value (selling the used truck at the end of the lease)

seattlecyclone

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Re: Are index funds unethical?
« Reply #25 on: September 23, 2019, 04:46:19 PM »
Excellent analogy seattlecyclone. +1

It is a good example. Effects on Ford would be indirect, but if the secondary market for Ford trucks dropped out, it would definitely impact Ford - as an example, the lease market would die, because they rely on residual value (selling the used truck at the end of the lease)

Agreed. If enough people decided to avoid used Ford trucks that there was a material affect on the price in the secondary market, that would affect whatever parts of their business rely on a robust used truck market (parts sales, service, resales at the dealership, leases, etc.).

Two things, though.

1) I have a hard time seeing a sustained price drop actually happening. Even if 75% of the truck owners soured on Ford as a brand, the price can only drop so far before the other 25% started noticing how good of a deal the used Ford trucks were compared to the used Chevys and Dodges and Toyotas out there, and they'd push the price back up. Maybe it wouldn't go quite as high as it was before, but there's only so much of a discount that the market is going to sustain. Same can be said for stocks. A divestment effort can only have a big effect on prices if practically everyone is on board. If even a small fraction of market participants are willing to profit from oil, the price can only go so low before the people with fewer morals than you step in to claim those earnings for themselves.

2) The indirect effects on Ford's earnings in this example only occur because Ford's business depends on servicing used cars. How much new stock are these oil companies actually issuing? The big guys seem to be well-capitalized with little need to seek capital from the equity markets. They might issue a few new shares as executive compensation or in an employee stock purchase plan. A hypothetical price drop in the shares might affect these folks a bit in their wallets, but it's hard to see how this translates into these companies deciding to stop the drilling.

Now, I think there is a reasonable argument to be made that these companies may be overvalued, so you should divest not out of any moral reasons but because they're simply a bad investment. They can't possibly extract all their proven reserves and also not kill off much of the human race. If we're going to get through the next few decades we're going to have to somehow stop them from extracting and selling all that oil. Will that lead to lower profits than the current share price would suggest, or is this already being baked into the price of the shares? The big oil companies have lagged the broader market in the past few years. Maybe this trend will continue, and you'd do well financially to dump oil companies, or maybe the risks to their business have already been priced in. I don't have enough information to really make a guess either way.

maizeman

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Re: Are index funds unethical?
« Reply #26 on: September 23, 2019, 06:18:57 PM »
Another vote for terran's approach. Index funds advertised as ethical/socially responsible tend to lag the overall index by about 0.5 to 1%/year through a combination of higher fees and lower returns. Since owning the stock of a given company doesn't do anything to directly enrich that company or give it more resources, I think it is possible to achieve more of the change you seek to make in the world by owning complete index funds and donating 0.5 to 1% of your net worth/year to organizations seeking to achieve the changes you seek to make in the world.

Yeah, that analysis is outdated - or maybe just wrong. I dunno where Swedroe pulled his numbers - I first went to Google*, then to Vanguard comparison directly and got the same answer. The other two of his examples have ridiculous expense ratios, so I stuck with the Vanguard example he used:

Social investing (VFTNX vs VFINX) has a notably higher return on the 1, 3, 5 and 10 year timeframes. Across the board, social investing "won" a better return. On the 10 year, it's just over 1% better.

Oh yikes! Thank you for the correction @TomTX Very good to know.

Sanitary Engineer

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Re: Are index funds unethical?
« Reply #27 on: September 24, 2019, 07:28:55 AM »

While I don't think it is as cut and dried as that (see discussions above) since you do surely there are options open to you beyond alliances with companies that are wrecking the world and leaving your money in the bank to lose value to inflation?

What about investing in individual stocks of companies with strong ethical track records? An investment account split between, say, Patagonia, the Dr. Pepper/Snapple Group, and Etsy and a half dozen other similar companies is going to be way more volatile and risky than one invested in index funds, but still will almost certainly outperform cash over the super long run.


Are you aware of a method for investing in Patagonia?  I would do that, but they aren't publicly owned - which allows them to make decisions that don't consistently increase share prices over the short term.  They are the company I thought of in this context. 

Even Patagonia can't produce clothing without harming the environment.  They could stop producing clothing, but they have chosen to work to minimize and offset their environmental impact. I think it is similar to living.  No one can live without impacting the environment in some way.  I think the goal needs to be to minimize the impact and be aware of what hasn't been minimized yet. 

The stock market doesn't strike me as the low hanging fruit as far as minimizing my personal environmental impact.  My dollars in the market aren't doing as much harm as my car driving habit, the convenience meat I eat, or my leaky house.

Mellabella

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Re: Are index funds unethical?
« Reply #28 on: September 24, 2019, 07:33:30 AM »
Some very in-depth explanations here thanks guys. Im definitely interested in the debate about personal responsibility vs socially responsible investing vs government action needed. It seems like ethical investing would make the least difference especially in the case of index funds. I like the idea
of ethical index funds if they perform well. I think ultimately though I will put my energy into political action and give time & money to causes I care about.

Mellabella

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Re: Are index funds unethical?
« Reply #29 on: September 24, 2019, 07:38:27 AM »
This is the conclusion Iím coming to too sanitary Engineer. Not the low hanging fruit or the most effective way of making a difference. I think this was more emotional/ guilt driven logic (which I am prone to). Social worker here. ;)
« Last Edit: September 24, 2019, 07:45:16 AM by Mellabella »

flipboard

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Re: Are index funds unethical?
« Reply #30 on: September 24, 2019, 12:12:31 PM »
Breathing is unethical, life is unethical.

ESG is a load of hogswash though. E I can almost mostly agree with, except for those excluding nuclear - that's just shooting yourself in the foot. S is questionable, depending on whose selection you follow. G: why is that even part of the criteria? (Even then, ESG completely misses the fact that ESG investing will not move the needle in any way. You can launder your own guilt that's true, but it has zero influence on the world.)

Scandium

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Re: Are index funds unethical?
« Reply #31 on: September 24, 2019, 02:06:58 PM »
Nope. The coming/ongoing environmental armageddon can only be solved by serious, concerted government action, not individuals buying shares. As most countries (that matter) are ruled by ruthlessly selfish psychopaths this has just about zero chance of happening. So might as well just enjoy it as much as possible until the end.
good luck-have fun..

TomTX

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Re: Are index funds unethical?
« Reply #32 on: September 24, 2019, 06:13:51 PM »
And the nihilists have arrived. We were having such fun til then. *sigh*

Buffaloski Boris

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Re: Are index funds unethical?
« Reply #33 on: September 24, 2019, 06:30:14 PM »
Breathing is unethical, life is unethical.

ESG is a load of hogswash though. E I can almost mostly agree with, except for those excluding nuclear - that's just shooting yourself in the foot. S is questionable, depending on whose selection you follow. G: why is that even part of the criteria? (Even then, ESG completely misses the fact that ESG investing will not move the needle in any way. You can launder your own guilt that's true, but it has zero influence on the world.)

What surprises me is that we havenít seen the other side of the trade: socially irresponsible investing.


maizeman

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Re: Are index funds unethical?
« Reply #34 on: September 24, 2019, 06:44:28 PM »
What surprises me is that we havenít seen the other side of the trade: socially irresponsible investing.

Isn't that the niche the vice fund is trying to fill?


Buffaloski Boris

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Re: Are index funds unethical?
« Reply #35 on: September 24, 2019, 07:23:19 PM »
What surprises me is that we havenít seen the other side of the trade: socially irresponsible investing.

Isn't that the niche the vice fund is trying to fill?



Looks to me like their vices are pretty limited and more reflective of what was considered taboo a couple decades ago. No oil companies, Wall Street banks, or mining.

Trevor Reznik

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Re: Are index funds unethical?
« Reply #36 on: September 25, 2019, 04:11:17 AM »
Even the vegans are eating food that is grown using fertilizers that are produced from oil that is provided by these energy companies.  Oil is life.  Energy is life.  Minority protesters clogging up cities causing traffic jams (ie/ increased emissions) and shouting at anyone who doesn't agree with them are immoral.
« Last Edit: September 25, 2019, 04:14:42 AM by Trevor Reznik »

Davnasty

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Re: Are index funds unethical?
« Reply #37 on: September 25, 2019, 07:50:21 AM »
Even the vegans are eating food that is grown using fertilizers that are produced from oil that is provided by these energy companies.

Sure, given the system we live in, some consumption of fossil fuels is unavoidable outside of extreme measures. But if you had a choice of paying $10 for a drink or $1, you wouldn't say "doesn't matter, they both cost money" would you? The production of plant based food typically uses a small fraction of what animal products do.

So your statement isn't wrong, I just hope no one uses it as an excuse to give up and do nothing.

Minority protesters clogging up cities causing traffic jams (ie/ increased emissions) and shouting at anyone who doesn't agree with them are immoral.

I'm not convinced that protesting is always an effective means of achieving change, but I assume the protesters are. And if they're correct, the damage they do for one day is minimal compared to the damage they can prevent long term if they influence government policy or human behavior. (Again, there's an "if" in there)

flipboard

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Re: Are index funds unethical?
« Reply #38 on: September 25, 2019, 10:23:02 AM »
And the nihilists have arrived. We were having such fun til then. *sigh*
I'm not a nihilist, I'm a realist.

I use the elections and referendums I partake in to push towards greener policy (my votes have helped ensure that e.g. people need to move towards e.g. heatpumps for heating in any new or re-construction, that railway capacities are increased to help reduce car usage, etc.). Excluding about 10 dollars worth of an oil company in my total investments meanwhile has no effect beyond increasing my investment costs, while arbitrarily excluding industries that I actually think are needed to avoid climate meltdown (nuclear), or that I don't care about (gambling, alcohol).

TomTX

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Re: Are index funds unethical?
« Reply #39 on: September 25, 2019, 07:26:01 PM »
And the nihilists have arrived. We were having such fun til then. *sigh*
I'm not a nihilist, I'm a realist.

I use the elections and referendums I partake in to push towards greener policy (my votes have helped ensure that e.g. people need to move towards e.g. heatpumps for heating in any new or re-construction, that railway capacities are increased to help reduce car usage, etc.). Excluding about 10 dollars worth of an oil company in my total investments meanwhile has no effect beyond increasing my investment costs, while arbitrarily excluding industries that I actually think are needed to avoid climate meltdown (nuclear), or that I don't care about (gambling, alcohol).

You do you.

I will comment that if you're invested in VTI and only $10 is in fossil fuels, your whole VTI investment is just $110.

I've got substantially more than that in the market. I've taken something upwards of $50,000 out of fossil fuel investments - and I'm not even FIRE. If you want to figure your own investment, VTI was 9.13% fossil fuel stocks when I checked.

I also happen to think that these companies are DRASTICALLY overvalued. We simply cannot keep burning fossil fuels like we are. It's like all the investors in tech in 1999.

We can talk nuclear if you would like - but modern nuclear builds in the West are universally an economic and project management failure. Budgets blown not just an extra 100%, but 200% or more. Timelines blown by many years. If they finish at all. Not just the USA: France, UK, Finland. All basically the same.

Maybe the small modular guys can figure out economic nuclear reactors in the modern era, but the classic "big nuclear" guys are a total failure right now. They aren't a solution. They are a distraction.

In the meantime, geothermal, solar, wind, demand shifting (ie - incentivize users to charge when clean energy is plentiful) and HVDC interconnects can get us a MUCH cleaner grid before the first nuclear plant started today could be finished.

TomTX

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Re: Are index funds unethical?
« Reply #40 on: September 25, 2019, 07:31:01 PM »
Another vote for terran's approach. Index funds advertised as ethical/socially responsible tend to lag the overall index by about 0.5 to 1%/year through a combination of higher fees and lower returns. Since owning the stock of a given company doesn't do anything to directly enrich that company or give it more resources, I think it is possible to achieve more of the change you seek to make in the world by owning complete index funds and donating 0.5 to 1% of your net worth/year to organizations seeking to achieve the changes you seek to make in the world.

Yeah, that analysis is outdated - or maybe just wrong. I dunno where Swedroe pulled his numbers - I first went to Google*, then to Vanguard comparison directly and got the same answer. The other two of his examples have ridiculous expense ratios, so I stuck with the Vanguard example he used:

Social investing (VFTNX vs VFINX) has a notably higher return on the 1, 3, 5 and 10 year timeframes. Across the board, social investing "won" a better return. On the 10 year, it's just over 1% better.

Oh yikes! Thank you for the correction @TomTX Very good to know.

There's one extra data point I'd like to see from Vanguard - the return of VFINX since the inception of VFTNX (return of the older fund since the start date of the younger.) Comparing raw "since inception" returns is silly since inception date was nearly 30 years apart.

Scandium

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Re: Are index funds unethical?
« Reply #41 on: September 26, 2019, 07:57:18 AM »
And the nihilists have arrived. We were having such fun til then. *sigh*

sorry, didn't mean to collide your idealism with the reality-based community

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Re: Are index funds unethical?
« Reply #42 on: September 26, 2019, 10:43:53 AM »
I will comment that if you're invested in VTI and only $10 is in fossil fuels, your whole VTI investment is just $110.

I also happen to think that these companies are DRASTICALLY overvalued. We simply cannot keep burning fossil fuels like we are. It's like all the investors in tech in 1999.
Well lucky that, I'm not an exceptionalist and therefore don't invest in just VTI. (And my factors probably have me tilting away from fossil fuels.)

But here you're:
1. Letting your emotions cloud you. There is no oil bubble, this is in no way comparable to the tech bubble.
2. Fossil fuels are likely to remain important, and become much less bad for electricity generation if/when CCS happens.
3. Oil will still be needed for plastics.

Quote
We can talk nuclear if you would like - but modern nuclear builds in the West are universally an economic and project management failure. Budgets blown not just an extra 100%, but 200% or more. Timelines blown by many years. If they finish at all. Not just the USA: France, UK, Finland. All basically the same.

Maybe the small modular guys can figure out economic nuclear reactors in the modern era, but the classic "big nuclear" guys are a total failure right now. They aren't a solution. They are a distraction.

In the meantime, geothermal, solar, wind, demand shifting (ie - incentivize users to charge when clean energy is plentiful) and HVDC interconnects can get us a MUCH cleaner grid before the first nuclear plant started today could be finished.
Now I'm confused: this thread was about morality, not budgets of nuclear. Even if they go over budget and go late, so does everything else - even then costs have no bearing on morality.

But the bigger issue is: transmission networks, and baseline load. Transmission networks are already straining due to the current levels of renewables. This is only going to get worse in the future. Without baseline generation the networks are doomed. Solutions? Well there's nuclear, or CCS with fossil fuels. Neither are pretty, but both are likely to be necesssary.


It's all an uncertain future, but don't  go deluding yourself that you're actually affecting the world, never mind even doing the right thing. Greenwashing makes people feel nice, but it doesn't actually change anything.

Legislatives and governments meanwhile: they have real power. Especially the USA *cough* *cough*.

TomTX

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Re: Are index funds unethical?
« Reply #43 on: September 26, 2019, 03:21:33 PM »
And the nihilists have arrived. We were having such fun til then. *sigh*

sorry, didn't mean to collide your idealism with the reality-based community

No, you decided to shit on anything that isn't your One True Solution then give up on everything.

I decline your reframing. It's the standard perfection fallacy - if it's not the Perfect Answer, it's not worth doing.

Bullshit.

Incremental improvement is still improvement.

Do we need concerted action? Absolutely. We need action on ALL fronts.

TomTX

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Re: Are index funds unethical?
« Reply #44 on: September 26, 2019, 03:43:05 PM »

Now I'm confused: this thread was about morality, not budgets of nuclear. Even if they go over budget and go late, so does everything else - even then costs have no bearing on morality.

You brought up the nuclear.

And your argument here is another false one "oh, everyone is just as bad"

Which is bullshit. Wind and solar projects are typically brought in on time, on budget - and with an initial timeline far shorter than a nuclear build.

Your "transmission strain" argument is bullshit as well. Last year, Texas had ~20% renewables for overall electricity production. There is no state incentive or mandate to do so at that level (we passed the GWB goal many years ago). That's more than triple the rate of renewables for the USA as a whole. Texas (ERCOT) has a very isolated grid - nobody's balancing with neighbor grids. It's a competitive market.

What's the really interesting part? The development pipeline. Projects far enough in planning to be registered with ERCOT.

<2 GW CCNG ("base load")
6 GW NG turbines (peakers)
35 GW of wind
65 GW of solar
5GW of batteries + CAES.

Texas energy companies aren't building these projects for fun, or for the environment - they're building them because they expect the projects to make the money.

Even with the glut of cheap natural gas, it's cost effective to do a massive buildout of renewables. Dozens of energy companies have come to the same conclusion.

Why? The all-in cost for building new wind and solar in many locations is cheaper per kwh than the natural gas in a paid-off  plant. When there's no wind or sun? Fire up some NG turbines. They typically have a capacity factor of about 10% (ie, being used only ~10% of the time).

The next 5 years is going to see a huge increase in renewable sourced electricity in Texas. From a starting point far ahead of the USA as a whole.