Can you ethically invest in unethical companies?

By Felix Salmon
October 22, 2010
The Panelist, devoted to "responsible and ethical investment advice".

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I first met my friend David Neubert in the context of a website he co-founded, called The Panelist, devoted to “responsible and ethical investment advice”. Dave’s moved on to other things now, but he still has opinions on the ethical-investment front. If you refuse to buy stock in unethical companies, he says, you lose diversification. Instead, Neubert looks to change the behavior of companies he’s invested in:

I exercise my ethics through shareholder activism–by supporting, or rejecting, shareholder resolutions with my vote. I like to think of this practice as socially conscious investing…

You have more power than you might think. For example, I own 2,600 shares of Valero Energy, which means my vote amounts to 1/220,000 of the company. Maybe that doesn’t sound like a lot, but compare that to my vote for president of the United States (1/130,000,000 voters); or even mayor of New York (1/4,000,000 voters).

And believe it or not, your shareholder vote may very well make a greater difference than the votes of institutional investors. Most company boards realize that individual investors tend to be more enduring in their views and a whole lot more loyal, making them more desirable shareholders than fickle institutions. If an individual voices an opinion at a shareholder meeting or writes a letter, corporations recognize that there are likely thousands of others just like them and they listen.

I don’t buy it. For one thing, using the vote as a comparison is setting the bar unbelievably low, since voting is statistically certain to make no difference at all:

Even for the most passionate partisan, it’s hard to argue that voting is a good use of your time. Instead of waiting in line to vote, you could wait in line to buy a lottery ticket, hoping to win $100 million and use it to advance your causes—and all with an almost indescribably greater chance of success than you’d have in the voting booth.

And what of Valero, a dirty oil refiner? Is it likely to listen to small shareholders like Neubert? Well, Valero has spent $4 million of its shareholders’ money in support of Proposition 23, which would void California’s 2006 Global Warming Solutions Act. Shareholders like the Unitarian Universalist Association are opposed to that spending, for good reason: the act is a good one and Valero is essentially lobbying for the right to profit from pollution, even after a law banning such activity has been passed.

Here’s how the LA Times reported the shareholder move:

The challenge was dismissed by officials at Valero, which has contributed $4 million to the Proposition 23 campaign. Like the other resolutions, the one offered to Valero’s board comes from a relatively minor shareholder: the Unitarian church…

The filers are a “stockholder activist group,” said Valero spokesman Bill Day in describing the Unitarian Universalist Assn. of Congregations…

The resolutions’ backers acknowledge that they are unlikely to have an immediate effect on campaign spending by oil companies.

The Unitarians have about $15,000 of stock in Valero; Neubert has about $46,000. Clearly, these sums are dwarfed by Valero’s donations to the Prop 23 campaign and equally clearly Valero has made its mind up that theses people are gadflies who should probably just be ignored.

The fact is that Neubert and people like him are not going to change Valero’s behavior. And the diversification benefits of owning Valero stock have never been lower, in these days of ultra-high stock market correlation.

If you consider yourself an ethical investor and you care about global warming, then it’s really hard to justify an investment in Valero, a company which is spending millions of dollars trying to repeal one of the few U.S. laws which takes global warming seriously. Certainly the diversification benefits of owning Valero stock aren’t in themselves sufficient to offset the fact that you, as a shareholder, are ultimately responsible for Valero’s expenditures on the Prop 23 campaign.

Ethical investing can and must go further than the simple obligation which all shareholders have to take their ownership stakes seriously and to vote on shareholder resolutions. It’s all well and good being conscious of the fact that your company is behaving unethically — but once you come to that conclusion, the ethical thing to do is to sell those shares. Otherwise, you bear 1/220,000 of the responsibility for precisely that unethical behavior. Dave Neubert has, in effect, spent $18 in support of Prop 23. What has he done to offset that expenditure?


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I can appreciate your argument, as well as David Neubert’s, but you do yourself no favors by linking to Landsberg’s vaguely silly — if common — argument about voting. Anyone who thinks that voting doesn’t matter should consider the relative priority that issues relating to senior citizens, who vote in high proportions, have with US politicians. The error that economists like Landsberg make is to treat voting as the action of an _individual_ rather than a group. This works for looking at markets, where every purchase has a marginal effect, but not for voting, where it is the size is the vote of various groups of voters that politicians pay attention to.

Posted by AlexR | Report as abusive

Note also that the market impact of a particular individual refusing to invest in a certain company is small. Both market impact and votes only have effect in the aggregate.

Posted by TFF | Report as abusive

Right. This should hardly be surprising; the whole point of the public corporation is to avoid responsibility and accountability. Unlike politicians, boards don’t even have to pretend to represent the wishes of the stockholders.

If Neubert wants to sway the Velero board and thinks stockholder activism is the way to go, he needs to expand his field of view–he needs to organize. He has to reach out to the Unitarians and other small holders–lots of them–and get them to act as a common voice.

Your only other choices are to live with dirty money or not invest in publicly-owned corporations.

Posted by Moopheus | Report as abusive


As one of the web’s most prolific finance bloggers I’ve read hundreds of your articles. I would say that 85% of the time I agree with you almost spot on. 10% of the time I might have one or two diverging viewpoints with your thinking, but agree on the main thrust of your argument…

… and 5% of the time I think you’ve not had your coffee when you wrote the article.

How on earth could you not think voting your proxies is imporntant. I vote all my proxies and more imporntantly I vote the proxies of every one of my customers that does not ask to do it themselves.

I always vote for the proposals that I think will increase long-term shareholder value and against ones that I think will decrease shareholder value.

You will always be able to point out some issues that will never be won by dissident sharewholder activist groups. (Like enviromentalists trying to get companies who’s business require carbon emissions to clean themselves up at investor expence.) That misses the larger picture of once “fringe” issues that are now being adopted by global 500 companies:

#1 the seperation of chairman and CEO roles… this provides a valuable layer of leadership… prevents a CEO from considering the company as his/her personal kingdom, and provides an emergency succession plan if your CEO drops dead of a heart attack, is led out of the office in handcuffs, or just jumps ship for a better offer. I seen this issue on proxy statements for at least 5 years now and they have gotten more votes each year. This year several companies have “caved” and actually reccomended a vote for rather than a vote against.

Shareholder say on pay… here again boards are starting to listen to the investors they represent. 5 years ago say on pay was a joke… now it’s gaining wide acceptance. 5 years from now I bet it’s standard.

Proxy voting is about to get much much more interesting by the way… as early as next year you might start seeing CONTESTED ELECTIONS! That would be a huge step forward from the rubber stammp process of director selection today.

Best hopes for more engaged investors leading to better managed companies and higher returns!

Posted by y2kurtus | Report as abusive

I surveyed ETF options for socially responsible funds in 2007, and liked the investment policy of KLD best. In 2009, I found that about 2/3 of that fund is what you would get from a broad-market index. Are there funds whose better ethics justify their higher fees?

Posted by MatthewFrank | Report as abusive

While Felix bloviates with his holier-than-thou attitude about oil companies, some of us with bills to pay invest in oil drillers to profit from Felix’s excessive oil consumption in the form of his love of sumptious meat and his world travels.

We investors don’t expect any thanks from Felix for helping to support his voracious oil habit.

Posted by DanHess | Report as abusive

As someone who doesn’t enjoy as much sumptious meat or world travel as Felix does, I find Felix to be a bit of a pig. head/

Posted by DanHess | Report as abusive

An interesting topic for you to feature today; if I saw a tweet correctly you are in South Africa. The ethical investing debate really took off in regards to the Sullivan Principles, aimed at that country. The broad adoption of the principles by pension plans was an important economic lever on the regime.

There are all kinds of issues here and much has been written about the relative merits of attempting to combine ethical decisions with investment ones — too much to deal with in a comment stream.

For now, I’ll recommend consideration of the @y2kurtus advice to vote in a fashion that increases shareholder value. One of the problems is that which seems additive to shareholder value today may be untenable corporate policy long term. Firms need to somehow be aware of the ethical dilemmas that they (and their shareholders) face and to consider the implications should they intensify.

Many business models have gone on the rocks due to the stubborn indifference of important social issues, whereas those that recognize them and come up with lasting solutions are the ones that deliver real long-term value.

Posted by tombrakke | Report as abusive

Anyone who thinks voting proxies amounts to a hill of beans is delusional. Boards may amend their articles, but it’s not because of proxy votes. If anything it’s because a scandal exposes how worthless the board is.

Posted by Zdneal | Report as abusive

considering how hard it is fro investors to be able to pick their representatives (that would be the board of directors) or how much say they have in how much the company pays its executives (none) its not much of a surprise that you can’t really control what you are putatively own. after all, if investors owned the TBTF banks, would they have done what they did? after all, the investors have been a roller coaster with only a few up ticks, and mostly down drafts, with them. and besides most of the stock is owned by institutional investors (pensions, funds, etc). and we see how well they vote for the owners of the stock

Posted by willid3 | Report as abusive

“We investors don’t expect any thanks from Felix for helping to support his voracious oil habit.”

Hi Dan, that reminds me of the recent spat over “rare earth” mining. Seems that China has 30% of the world deposits, but 95% of the world production. The US has substantial deposits itself, but no domestic production at all. How can we justify importing 100% of our consumption of a resource that is so critical to the semiconductor industry?

Apparently rare-earth mining is messy, involving a variety of toxic and radioactive minerals mixed in. So we prefer to export the pollution to China (and then loudly complain when they object to meeting our demands for increased supply).

Posted by TFF | Report as abusive

y2kurtus, I wrote about “the obligation which all shareholders have to take their ownership stakes seriously and to vote on shareholder resolutions” and somehow you read into that that I don’t think voting proxies is important. Maybe it’s you who hasn’t had enough coffee this morning?

My point was that even though voting proxies IS important, it’s not sufficient (even if it’s necessary) if you wish to be an ethical investor.

Posted by FelixSalmon | Report as abusive

@TFF –

Very true. The choice isn’t so much oil or no oil. It is Iranian jobs and cash or American jobs and cash.

As far as unethical companies, my I nominate Apple as public enemy number one for turning several hundred million iPOD-addicted youngsters worldwide into addled zombies so afflicted with ADD that they can barely make eye contact, let alone hold a conversation?

Then again, I sure do love the PC! Thank you Steve, for your past work!

Posted by DanHess | Report as abusive

Let’s be serious!
Very unethical behavior and even mentality is present all across America, from low to high level, no conscience present in this country. Children dye every second of starvation (somewhere in the world) and you here care only about the next house, car or trip that you will purchase and still in debt you are.
Primitive behavior!

Posted by rxn | Report as abusive

@DanHess, as far as “unethical companies”, I would have to vote for Verizon.

* “Gotcha” fees that can run thousands of dollars for services that would be covered in the right “unlimited” plan for $60/month.

* Third-party billing that is passed along WITHOUT QUESTION and cannot be disputed through Verizon. You can attempt to resolve the matter with the third party, but you cannot refuse that portion of your bill. Any money you send to Verizon is applied to third-party charges first, giving lie to the statement “your service won’t be terminated for failure to pay these charges”.

* “Guaranteed lifetime” rates that steadily increase as they tack on additional fees (including charges that had previously been paid by Verizon).

The best way to invest ethically, if you wish to do so, is to start your own business and run it according to the highest standards. “Voting with your feet” is only effective if a substantial minority does so because the money is fungible. “Voting your proxy” faces a similar uphill battle.

Posted by TFF | Report as abusive

Maybe it is true you can have change the direction of the company with your vote, but this is only going to happen in companies that have some greener products or ideas along with their pollution pumping product. Companies that do not have any such ideas on the horizon you won’t change with 1/130,000,000 or 1/220,000 votes.

Posted by randomRT | Report as abusive

Another way to support what you do or don’t believe in is to buy or not buy certain products. Of course, sometimes this requires looking into the value or supply chain. If you believe that climate change is an issue to be addressed (which I do because I’ve worked on it for 20 years, and note that I am a business person working on making money on a variety of solutions), then use your wallet to buy products and services from companies that have similar values. I will not buy anything from Valero, Koch or the others that support Prop 23 (and please note that Prop 26 needs similar attention as it might be used as a back door to shut down CA’s efforts to address greenhouse gas emissions).

Posted by side | Report as abusive

Yes my portfolio is less diverse, because I do invest more ethically and have removed myself from any investments associated with the (racketeers) Wall-street. There were far too many funds with, but I had no qualms in removing them.

I also invest in an ethical fund that ensures that those in it are also doing some good. (no, not doing God’s work, but doing no harm)

You can choose a fund or group of funds that match your ethical standards. No animal testing, clean and green, ones with different hues of green, cleaner energy and technology, new energy and Local growth funds. The funds have performed well over the years, for those of us that had long term and diverse retirement funds with less risk. They did far better then my American funds.

It is nice to have the choice, but I doubt that my voting had any bearing on the ethical behaviour of companies/Banks who continue to act unethically. Voting en masse (vocally/structured) and Boycotts en masse are the only thing that will hurt a company enough to change.

I vote with my actual vote, my voicing, my written word and my feet. But then, that’s my standard of ethics. Am I making a big difference? Not so anyone else can tell, but it makes a difference to me.

Posted by hsvkitty | Report as abusive

TFF: China’s market share in rare earth mining is due to decades of heavily subsidized exports. THe subsidies were done consciously to maintain levels of employment and increase market share despite sometimes operating at heavy losses (much of their industry has not been profitable at times). Now they recognize that if they don’t reduce exports (ie. subsidies) their deposits will run out more quickly than they are prepared to deal with.

Felix: Good topic. I’ve silenced my conscious by concluding that my exposure to any one company is infinitesimal in relation to outstanding shares. If refraining from buying a share in valero would have no impact, then buying a share would have no impact as well.

Posted by bernankesbubble | Report as abusive

Hi again Felix,

When I read “I don’t buy it…. since voting is statistically certain to make no difference at all” I thought it came across as saying that voting proxies was minimally imporntant.

I very much belive that even a very small investor has a far better chance to bend the course of a multi-national company than a single voter has on swaying the course of a regional or national election. The math David Neubert put forth is hard to argue with on that point.

There are obvious limits on small shareholders voteing power. An obvious example would be the case of the enviromental group trying to get a company in a globally competitive industry like oil refining to spend hundreds of millions of dollars to make a refinery more envriomentally sound and LESS financially sound. That trade-off has no place at the individual company level.

Publish a set of envriomental rules for all to follow and the companies who can achive the targets by spending the least will win in the marketplace.

So I’m quite sorry if I twisted your words in a way you did not intend and keep up the fantastic writing.

p.s. to bernakesbubble… the idea that you exposure to any one company is so small as to have no impact is an obvious falacy. Most mega-cap companies are so large that no single investor owns even 5%… but they are still governed by the collective voice of their shareholders.

In the near term those small voices will get much louder… soon any long-term investor group with a 3% stake will be allowed to nominate a diretor on the company proxy statement. I’m very hopeful that this will force directors to listen more intentlyly to shareholders and less intently to CEO’s.

Posted by y2kurtus | Report as abusive

@bernankesbubble, interesting point on China. Whatever the rationale, we will likely need to restart our domestic production at some point.

One problem with investing in “unethical” companies is that they face a greater risk of regulatory crackdown (and that can slam profits). I tend to be risk-averse, so I rarely take positions in such companies and am quick to sell when I do.

Posted by TFF | Report as abusive

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