Blogs & Comment

Financial stocks and SRI

In my previous post on the U.S. financial sector, I expressed misgivings thatit would be a good place to invest over the next decade or so, considering how big it has become. Some leveling off of growth, or reversion to the mean, could be in store.
Could another case for avoiding financial stocks be built on socially-responsible-investing (SRI) grounds? For one thing, the industrycertainly qualifies in terms ofhardshipinflicted on society.
The financial crisis triggered by the industry has resulted in plunging U.S. house prices, high unemployment and a huge government bailout that will cost taxpayers trillions of dollars. The damage caused would seem to be at least commensurate (albeit of a different kind) with the damagecaused by the typical SRI targets of tobacco, gambling, alcohol, etc. companies.
For another thing, the financial sector is characterized by high levels of greed. Compensation and bonuses bring out a very aggressive pursuit of monetary rewards. There is nothing wrong with the profit motive, but in this sector, financial gain seems to often be pursued without regard for the consequences on others.
A case in point is theindustry practice of regulatory arbitrage. Thats when profits are reaped from finding ways to skirt regulations aimed at meeting some useful economic or social goal.
Actually, as I understand, SRI is pursued a bit differently these days compared to the movement’s early days. Funds and institutions that follow SRIdont necessarily avoidsin stocks any more; they are now open to investing in the more socially conscious members of a sector with ill repute– and using shareholder meetings etc. to lobby for advances in social responsibility.
So, instead of avoiding all financial companies per se,a SRI investor might screen for those that display relatively more enlightenment. And once invested, SRI investors can use shareholder meetings and other channels as platforms for persuading executives to adopt more ethical practices.