Editor’s Note: This excerpt has been adapted with permission from the appendix of The Good Investor: How Your Work Can Confront Injustice, Love Your Neighbor, and Bring Healing to the World by Robin John. You can order the book here.
One thing I love about my job is the conversations I have with people who genuinely desire to do good things in the world.
Often, when I’m sharing the investment philosophy that I’ve offered in my book, similar questions arise—lots of really good questions. I wanted to list a few of the most common ones and tell you how I think about them.
Obviously, these answers aren’t final. Real life often presents complex dilemmas and requires patient discernment. I hope that what you find here (in this whole book, really) will encourage you to ponder these things for yourself and arrive at your own convictions.
If I Invest Based on My Values, Won’t My Investments Underperform?
Over short periods of time, you’ll see variance up or down, but generally, over long periods, the returns are roughly the same. A recent comparison of an S&P 500 Index portfolio screening out companies widely considered objectionable by values investors performed slightly better than the index itself.
Jon Hale, head of Sustainability Research at Morningstar, summed this up well in this article, saying:
The idea that sustainable investing is a recipe for underperforming is a myth. Like most myths, there is a kernel of truth to it—that exclusionary screening for nonfinancial reasons can limit portfolio performance. We found evidence in the research that exclusionary screening can have a negative effect. But the research also finds intriguing evidence of a positive [values-based] inclusion effect, which is bolstered by company-focused research suggesting that firm-level sustainability performance is associated with better financial outcomes.
Basically, Hale is saying that whatever we give up by excluding certain kinds of business, we gain on the other end by using these same criteria to identify the dynamics that point to healthy, successful businesses. If we screen out a tobacco company, for instance, sure—we’ll not make any of that tobacco profit. However, we’ll also (on top of staying true to our value of doing good rather than harm) have a new lens by which to find those companies poised for sustainable growth.
In The Ultimate Question: Driving Good Profits and True Growth, businessman Fred Reichheld explains research where he showed that the single most powerful leading indicator for a company’s future financial success is not its balance sheet or earnings or its price/earnings-to-growth ratio. Rather, the essential determinant is the degree to which a company serves its customers.
In fact, he proposes a very specific metric to predict how well a company will do. That metric is the degree to which a company seeks to serve its customers rather than maximize its profit. Being a good company is not a hindrance but instead leads to health and sustainable profits.
The Nature & Purpose of Business
Investing has a design and purpose: to fuel business. And business itself has a purpose: to create good products that serve others and to create those good products using good practices. Business is a social enterprise affecting all the business’s neighbors: customers, employees, vendors, the communities where they operate, the natural resources they use, and the wider society with whom they are relationally entwined. Everything a business does needs to be enacted with justice and stewardship toward everyone they serve.
When investors analyze whether a business they support and profit from is underperforming, the business needs to be judged against the full scope of that business’s purpose. This wider understanding of a business’s purpose helps rather than hinders wise evaluation.
Good businesses that are doing what they were intended to do, including making healthy profit, make the best long-term investment. Conversely, if we only look at immediate financial returns, that myopic focus might mask deeper, systemic problems hidden out of sight. Too often, we fail to factor in the cost or risk incurred when we evaluate a company’s performance only by its profit ledger.
We know there’s more than one way to make a profit. We can profit by pursuing justice and stewardship, or we can profit through exploitation and greedy shortcuts.
If we are only looking for immediate monetary profit with no consideration for any other factors, we won’t know the underlying engine for how those profits are achieved. However, if we investigate what’s behind the profits and think comprehensively about the nature of business and how business creates value (and how it can operate sustainably over long periods of time), then we discover a much deeper, more just and viable, means to find and evaluate those companies that will be truly profitable in the long run.
Why Sacrifice is Important
Even if these realities weren’t true and there was an inevitable cost to bear without any offsetting upside, I think we should still be willing to make sacrifices for those things that we believe are right and consistent with our morals. Is it worth a percentage point in return to follow our convictions and our sense of what’s good for our neighbors and the world? Is something genuinely of value to us if we aren’t willing to sacrifice anything for that supposed value?
We may be tempted to narrow our focus too much on the tiny picture when we’re up to something far larger, a cause far more substantial for our own integrity and for the common good. We can concentrate on financial benchmarks and completely miss the joy of participating in human flourishing by allocating capital in ways that bring about good.
We could be a loan shark, or we could give a loan at a discount to the same person struggling in poverty as a way of making a profit while also helping a family. What type of people do we want to be?
