Recently, I’ve gotten into a few arguments regarding socially responsible investing. The argument goes that by holding stock in these companies, one is inadvertently supporting the company’s actions. So buying a stock like General Dynamics, developer of the F-16 fighter jets used by the Israeli army, would be helping to enable war in the Middle East. Or a more high profile case whereby Harvard, Stanford, Yale and a variety of other funds have divested off PetroChina, purportedly supporting genocide in Sudan.
And its something thats only going to happen more often. Research estimates believe that the socially responsible investing market in the U.S. will reach $3 trillion in 2011. Shareholders will also increase the pressure on institutions to divest off unethical firms.
So how exactly does this result in unethical businesses becoming undervalued? If the trend towards socially responsible investing continues, demand for the stock of unethical businesses will decrease and correspondingly decrease the stock price. Unless the social effects of these businesses are somehow monetized in the future (e.g. Palestinians can sue General Dynamics for developing the F-16), the decrease in stock price will have no correlation with the company’s profitability and therefore result in the company being undervalued.
Unfortunately, buying the stock wouldn’t result in profits. The increasing prominence of socially responsible investing would only serve to drive down the stock price further and decrease capital gains…
However, where this might actually be useful would be through corporate bonds. A decrease in demand for an unethical business’ bonds will increase the yield, with no corresponding increase in risk premium. Socially responsible investing probably isn’t significant enough for it to be a genuine arbitrage opportunity, however it definitely does bear future consideration.
Posted by jqwerty 
