Slow and Steady Can Win the Socially Responsible Investing Race

You're scrolling through your social media news feed when you see a post about a particular company and its latest scandal. Let's say it's a powerful company with an outspoken CEO who has said something that makes it seem like he doesn't care about climate change. You see comments from your friends echoing shared outrage:

"Can you believe this guy?"

"He needs to be fired."

You feel anger at the CEO and at the company for making him CEO. But then…

A day passes and, in response to the social media reaction, the CEO goes on a press blitz to apologize for his comment, explaining that he didn't mean it that way and that he would take it back if he could. Further, he explains that his company is absolutely committed to combatting climate change. He details a list of all the steps his company has taken to implement environmentally responsible corporate policy and even introduces a new climate change program as part of the corporate response to the scandal.

This story is hypothetical, but its plot points are probably familiar. The challenge for people who care about social responsibility is figuring out how to react to this flow of events. For socially responsible investors who own stock in the company, the challenge is especially great. Do you sell the stock of the company rocked by scandal, never to return? Or do you temporarily sell and then reinvest once the scandal has passed and amends are made? Or do you hold the stock and then wait to see how the company's scandal and subsequently implemented policy changes impact greenhouse gas emissions over the course of the year before making your decision?

If you sell every company in your portfolio that has a scandal and never buy it again you'll most likely end up dumping every stock you hold. Selling when you read a piece of bad media coverage and buying when you hear about new socially responsible programs might leave you chasing trends instead of being ahead of them, not to mention that you'll likely find yourself trading in and out of the same stocks over and over again; doing a lot of work but getting nowhere fast.

Scandals happen but they don't necessarily reflect the corporate substance beneath the disastrous PR appearances. Similarly, companies that look good on the surface may be anything but when you take the time to look under the hood. If you assess how a company has performed over the course of a longer, defined period of time, say a year, you can make a quantified judgment about how socially responsible the company truly is. Then you can make your decision whether to sell some shares or perhaps, buy more.

It seems to be human nature to want to bring justice to bad actors and, for those with a socially responsible investing objective, to punish companies that we feel are in violation of their duty to humanity. But a knee jerk response to passing tabloid fodder may not be the most effective route for the achievement of long term goals. Judging companies on their actions over a sustained period of observation can help socially responsible investors avoid the pitfall of merely inflicting punitive measures instead of creating and sustaining positive impact. In socially responsible investing, slow and steady can win the race.

About the Author

James Katz, founder and CEO of Humankind Investments, is an experienced quantitative equity analyst and data scientist with a passion for socially responsible investing. He got his start in the ETF industry as a quantitative equity analyst and data scientist at Vanguard, before founding Humankind. He holds a PhD in Business Administration from Stanford University's Graduate School of Business and a BA in Psychology and PPE (Philosophy, Politics and Economics) as well as a BAS in Computer Science from the University of Pennsylvania. James is a CFA charterholder.