A number of friends are starting their IRAs and discussing investing as a means of financing their retirement. Much of that discussion has revolved around the want to purchase shares in socially conscious companies. The most accessible vehicle to achieve this goal appears to be investing into mutual funds that screen for environmentally and socially responsible companies.

I highlighted my comments and concerns in previous posts (Fidelity Investments and Lessons from the Forum) in regards to this topic. After further thought and reading I have come to a deeper understanding of socially conscious investing. Owning a share of a company can have an impact on their business practices. The level of that impact by an individual is so small as to be almost immeasurable however. That does not mean that you should abandon socially conscious investing.

I strongly suggest reading the article Why Do Companies Care About Their Stock Prices? from Investopedia. The four reasons that the article highlights makes sense to me.

• The managers of the company are shareholders: If the price of the companies stock decreases then the individual stakeholders within the company will see a decrease in their net worth. Therefore, they have a truly vested interest in the stock price increasing.
• Investors are partial owners of the company: As owners of stock in a company we have a legal right to use shareholder meetings to initiate changes in the business practices of the company. The level and amount of organization that is required to make this effective appears to make this practice unusable for an individual. However, managers of mutual funds that hold large percentages of shares in companies have a higher ability to steer the company towards better practices.
• The stock price is a measurement of a company’s financial health: A healthy company is able to obtain funds to continue or expand beneficial business practices. Sustainable business practices have a cost and a company has a stronger ability to invest in the practices if their stock price is growing.
• Weak companies can be purchased more easily: A low stock price may allow another company the opportunity to make a bid to control the business. There is no guarantees that a business will continue similar social or environmental practices if purchased by a new company.

My feeling is that we have the least amount of influence on a company’s behavior as individual investors when we purchase stocks in a company on the secondary market. This is based on our not providing funds directly to the company selling the stock. Individual investors are also hampered in their influence on the company by their limited percentage of ownership.

I do believe that companies care about their stock price for the reasons that are outlined in the article. These reasons are influenced by stock ownership and therefore we have some impact on this complex financial system. Literally, buying into a companies sustainable business practices is showing support for their decisions.

More importantly, as an investor you should feel comfortable with your purchases and for that reason alone, purchasing stocks and mutual funds utilizing socially conscious investing practices is a good idea. My conclusion is that investing in the stock market is not the primary vehicle to promote sustainable development. Investing with an environmental and social purpose demonstrates support for this ideal, however. The greatest impact we can have on society is in our direct action, not stock purchases on a secondary market. I believe that my purchasing Greenpower and highlighting KIVA are more important steps towards sustainability.

Link Roundup for March 3, 2007:

TXU still working hard to be a green coal company. Will it be able to turn over a new (green) leaf?