Ideas for Socially Responsible Investing

Corporate social responsibility can make good business sense, but the investment options can be a little pricey

Alex Bryan 14 January, 2015 | 3:49PM

In 1970, Milton Friedman famously wrote, "There is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud." While that may seem like an extreme view, Friedman does have a point. As the owners of a firm, shareholders hire managers to act as their agents. When managers focus on profit maximisation, they also tend to maximise shareholder wealth. If they choose, shareholders can then donate part of that wealth to social causes that are important to them.

To the extent that managers pursue objectives other than profit maximisation, they may reduce shareholders' wealth and effectively substitute shareholders' priorities with their own. Profit maximisation also tends to promote efficiency and accountability. In the pursuit of their self-interest, firms usually allocate scarce resources to their most productive uses.

The trouble is that firms do not always bear the full social costs of their actions. Economists call these phenomena ‘negative externalities’. For example, a coal power plant that expels its waste into the atmosphere could increase the prevalence of acid rain and make the surrounding area less desirable to live in, potentially hurting property values. Because the power generating firm does not directly bear these costs (in the absence of regulation), it may produce more electricity from coal than is socially optimal. So a narrow focus on profit maximisation does not always lead to the most efficient social outcome.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Aberdeen Ethical World Equity A Acc277.16 GBP0.07
Kames Ethical Equity GBP A Acc187.79 GBP0.27
UBS ETF MSCI UK IMI SRI GBP A dis1,435.91 GBP0.89
UBS ETF MSCI World SRI USD A dis GBP8,262.93 GBP0.72
Vanguard SRI Global Stock GBP Acc276.03 GBP0.37

About Author

Alex Bryan  is an ETF analyst with Morningstar.

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