Can You Be an Ethical Investor?

Stocking up in a green portfolio has been a growing global trend, yet some investors speculate that screening for ethically or socially responsible companies isn't as earth-friendly as one might hope. The notion of ethical investing in of itself presents a problem for the socially aware individual, as opting out of some investments for the sake of "cleansing" ones portfolio might do more harm than good.

The Sustainable Business website publishes an annual list of socially responsible funds ranging from large-cap to small-cap options. But the companies represented, said to be taking steps toward a more sustainable planet, include potentially shady corporations such as Nike and Whole Foods.

Nike has long been scorned for its unethical child-labor practices, which it outsources to underdeveloped countries, and Whole Foods founder John Mackey has garnered negative media attention for using an alias on Yahoo finance boards to blast competitors. Recent rants in Portland, Oregon lament the organic food chain for wasting tons of produce every year instead of donating the less-than eye-appealing foods (but still nutritionally beneficial) to homeless shelters and food banks.

The fact is that sustainability is a widely defined term that incorporates any facet of a business that may appear socially or ethically responsible.

Those wary of this definition may strive to screen out some investment options from their portfolio. "Sin" investments like alcohol and tobacco are popular choices to avoid, but is it really in the investor's best interest to forgo these potential hefty profit earners?

In some states, for example, tobacco is highly taxed to subsidize public schools and some health initiatives. In Oregon cigarette taxes help support the Oregon Health Plan, parks and public services, as well as public schools and police. So if one avoids taking up stock in this investment option, they might very well be avoiding the contribution of their funds to some byproducts of these funds that actually contribute to people-friendly practices.

Socially responsible investing might also give lackluster returns. Because some shareholders might opt out of several options, they might have a limited amount of diversity in their portfolio. But since diversity is vital to retaining a solid asset allocation balance, they might be putting too many eggs into one basket.

And what if that basket sounds morally responsible, but contributes to poor living standards in other countries or the increasing output of unfriendly fuels and pollution?

The Sierra Club has become a name synonymous for earth-friendly practices, but if one invests in their mutual fund holdings, they are putting their money into Outback Steakhouse and Calgene, a company that produces pesticides. Outback probably doesn't care whether or not their cows have lived a grass-fed and organic lifestyle in open pastures (actually they are grain fed cattle), and the Sierra Club probably doesn't mention this - or other incongruent - details.

Plainly put, there is no safe bet for sustainable support as an investment option. As with all businesses, the pinnacle for success is measured by the bottom line, and it can be hard to tell when a company claiming "awareness" hides the ugly side effects of selling out to strike it rich. You must research your options if you want to find out the nitty gritty, but remember that their will always be little sordid details that escape the PR spin. Put your money where you feel you will reap the greatest rewards for you and the planet - but don't put too much stock in thinking you're doing the earth a favor.