Crowd sourced ethical investing?

Investing in shares is easy. Don’t be stupid and think you can beat the game, just pick an index fund:

Early that year before Google’s IPO, Senior Vice President Jonathan Rosenberg realized that he was about to spawn thousands of impetuous young millionaires, and feared that they might be preyed upon by the wealth management industry. After consulting with founders Sergey Brin, Larry Page and CEO Eric Schmidt, he planned a series of in-house investment seminars to educate their soon-to-be wealthy colleagues. In the spirit of the “don’t be evil” Google ethos, management decided to invest in the preparation of their employees for the coming onslaught of Wall Street pros hawking their wares.

Google, being the best at what they do, felt that their staff deserved the best that the money management industry had to offer. In turn they brought in Nobel Laureate and Stanford University sage William Sharpe, Princeton economics professor and former dean of the Yale School of Management’s Burton Malkiel, and revolutionary Vanguard founder and white-hat “Saint Jack”, more commonly known as John Bogle.

What did these world-renowned financial minds have to say? A simple but hard to accept truth – active money management doesn’t work. Instead, put your money into low-cost, diversified index funds and get back to the real business of life and to building Google into a world-class company. Over time and after fees and taxes, you will end up with more money and a better life.

Sound advice, but ethical investing is a whole different game. What if you don’t want to give money (capital) to the oil industry? Or to companies who profit on sweatshop exploitation? Or to weapons manufacturers? Index funds do this, and in order to avoid it you have to go back to active management. The whole benefit to an index fund is that a monkey can run it, so the operating costs (and therefore your fees) are as low as they get. With active management your fees are bound to go up.

Admittedly, those fees are probably more than worth paying for. The audits that (I assume) ethical investment funds engage in not only ensure your dollars aren’t contributing to global warming/war/exploitation, but might encourage other companies to choose more ethical business practices. They avoid getting on the “ethical blacklist” and can attract more investment.

Of course being the hacker that I am, I wonder if we can get the best of both worlds? Can we get low fees and ethical investment?

What if we crowd source the audits? We’d have an army of volunteers who don’t need to be paid anything. You could start slowly. Set up the fund as a normal index fund, spreading risk around by just buying the whole market. Everybody who buys into the fund can nominate a share, e.g. Lockheed Martin (NYSE: LMT), for audit. A wiki article goes up on the fund’s website, people can edit it and add evidence for / against the company’s ethical practices (with supporting evidence of course). After a certain amount of time or votes the company will get blacklisted (or not) based on the majority of the votes.

Of course the whole thing should be not for profit and open source.

Here are several problems which might come up with the model:

  • Witchhunts/mob mentality on unpopular companies without enough supporting evidence
  • Missing several ethical violations due to not investigating deeply enough
  • Corporations gaming the system by buying into the fund and rigging the vote
  • Sub-par returns compared to an index fund (but who knows, it could go the other way)
  • It will be too slow to blacklist the large share market, and too much unethical investment will happen in the meantime
  • Are the fees on traditional ethical funds that bad anyway?
  • How cheaply can the whole operation be run?

I am cautiously optimistic that it might work, but is there anything obvious I’m missing? What do you think?

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2 thoughts on “Crowd sourced ethical investing?

  1. Well thought and good idea.
    Can’t think of anything else, or how to answer the questions/problems, you’d need to talk to a financial person I guess.

  2. * Witchhunts/mob mentality on unpopular companies without enough supporting evidence
    – How does Wikipedia solve these issues? Can you arrange your sourced crowd into tiers of trust and accountability? ie. People who tend to collect good evidence (based on sourced research) and upvote companies based on that could be part of an elite who’s word carries moar weight than larrytheboobsinvestor who signed up this morning and started upvoting his personal stocks.
    Transparency of the system could help – ie. you have to declare your shares before you can buy any based on your votes. Just ideas, man.

    * Missing several ethical violations due to not investigating deeply enough
    – Over time these would play out. Perhaps in the beta version, the most anyone can invest is $10. Like extremely low stakes poker. When the system reaches a pre-determined level of accountability (ie. less than 2% accuracy or something) – then let people start investing real money.

    * Corporations gaming the system by buying into the fund and rigging the vote
    – Hm. Facebook log in? Vote monitoring with personalised details?

    * Sub-par returns compared to an index fund (but who knows, it could go the other way)
    – Hey man, I thought this wasn’t ALL about the money.

    * It will be too slow to blacklist the large share market, and too much unethical investment will happen in the meantime
    – See low-buy-in beta version idea.

    * Are the fees on traditional ethical funds that bad anyway?
    – See all the available data which you just need to *ahem* find and read.

    * How cheaply can the whole operation be run?
    – 0.1% of every purchase to operation, server hire, etc? Donation? Kickstarter?

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