What is Stopping Individual Ethical Investing?
Definition of Greenwashing (Manor)
By Nicolette Hendrawinata
What is Stopping Individual Ethical Investing?
Last June, my brother consulted me about an ethical dilemma he was experiencing in his personal investments. He questioned the ethics of buying the stocks of Activision Blizzard – a gaming company which had garnered controversy amid lawsuits alleging sexual harassment, employment discrimination, and retaliation within its team. Despite these serious internal problems, my brother saw an opportunity for an increase in value as the company was going to be acquired by Microsoft in the near future. Even though he admitted to feeling guilty for putting his money in a company with a history of mistreating employees, he wondered if the impact of a one-man boycott would be worth letting go of a promising investment opportunity.
My brother is not the only individual investor struggling with aligning their personal values with their portfolio. According to a MagnifyMoney survey, while 67% of individual investors think they have the responsibility to invest in companies that make the world a better place, only 32% say they actually invested in at least one socially responsible stock or fund. Thus, even though the desire to invest responsibly is already very much present, the implementation is another question altogether. In this article, I will propose two potential setbacks for the implementation of individual ethical investing – and how these setbacks can be attributed to a deficit of meaningful corporate action.
Corporate greenwashing makes it difficult for investors to identify ethical companies
The hard truth is, not every individual investor has the time, energy, or resources to do a deep research of every company they buy stocks of. After all, most people face time constraints from main activities like school, work and caregiving. As a result of these time constraints, individual investors tend to lean towards a more casual style of investing, with affinity for a company’s products or services, familiarity of the company, and positive public buzz playing the biggest role behind decisions to invest in a certain company. This tendency towards casual investing is also reflected in the way investors characterize themselves: a study by Morning Consult revealed that the top traits US investors use to describe themselves are “amateur,” “simple,” and yet “interested.” Thus, instead of the sophisticated process we usually associate with investing, buying stocks has become a much more simplified and intuitive process for casual investors.
While casual investing might be the most accessible for individuals with limited time and resources, this trend may cause a dangerous asymmetry of information between individuals and corporations. This gap in information creates an opportunity for companies to practice corporate greenwashing: making misleading claims about the environmental and social benefits of a product, service, or technology. As more companies realize that putting a progressive front is enough to gain public support, it may become harder and harder for resource-poor investors to identify which company is truly creating social impact and which company is only doing lip service.
Individual action may seem futile in the face of bigger players
Another hurdle is a staple in the debate surrounding environmental, social, and governance topics: the seeming futility of individual action in the face of bigger influencers like corporations or government. As stated by MIT Sloan Sustainable Initiative director Jason Jay, unless the investor is a very prominent institution like the Rockefeller Family Fund or the Harvard Endowment, divesting a stock will likely not have a significant impact on that company’s behavior. Similar to how my brother doubted his influence in the face of a billion-dollar company like Activision Blizzard, this line of thinking will most likely lead many individual investors to wonder if limiting their investment options is worth sacrificing their return on investment.
The seeming futility of individual action is further exacerbated by the fact that institutional investors currently only contribute a relatively small share of the total impact investing pool. Despite being the only group of investors with the capital resources to create change at the scale needed, institutional investors currently only account for about 40% of capital in impact investing. Many institutional investors hesitate in funding social impact investments because they found it difficult to gauge outcomes accurately, especially the second and third order financial benefits from missions such as poverty alleviation or providing affordable housing. With such big investors hesitating and withholding funds from social impact causes, individuals might find it even more challenging to believe that their small contribution will truly make a meaningful difference in the world.
Individual ethical investing – not a lost cause?
The two setbacks mentioned in this article – corporate greenwashing and lack of contribution from institutional investors – are structural problems that have to be addressed over time with the collective efforts of business leaders and government action. However, the complexity of these problems does not mean that individual action holds no weight. Despite their lack of information and minimal personal impact, individual investors still hold the highest percentage of equities compared to any other segment of investors, including mutual funds and hedge funds. Therefore, as more individuals align their personal core values with their investment objectives, more companies will also strive to reflect the values of their stakeholders in their enterprise.
