I've been doing some thinking about charity vs investment as alternative ways of doing good (leaving open for now what that means). One question I'm wondering about is, in what circumstances does your choice of what to invest in have any welfare consequences at all (beyond differences in your own future wealth). I'm not sure about the answer and so, if any of you have comments or ideas, please put them down.
There is an argument that ethical investment is largely or entirely pointless, at least as a way of affecting asset prices and therefore making it easier for ethically acceptable companies to raise finance, giving owners/managers incentives to do things to make their companies ethically acceptable, etc. The argument against the effectiveness of ethical investment is that other investors who care only about financial returns will counteract any price change that ethical investors achieve – they will, eg, sell shares whose prices move higher than justified by future financial returns, and buy shares whose prices move lower because ethical investors sell or stay away from them.
I think that, though there is a great deal of truth in this, there are exceptions. They include cases where investors can provide money directly to companies; where investors can make asset prices depend on something other than financial returns; and where they can influence expected future financial returns.
(1) When you can lend directly to a company, through a loan or when it is raising money by issuing shares or bonds, then you can more or less directly influence the price at which it can raise money.
(2) If there are enough ethical investors, they could end up influencing prices by making some prices depend on something other than expected financial returns. How much money would have to be invested ethically before this happens would depend on how it is invested and the market capitalization of ethically acceptable and unacceptable companies.
If ethical investors just avoid investing in some companies (negative screening), then, so long as non-ethical investors have enough capital to buy the shares, bonds etc. of those companies, and they value them at the level implied by future payments (dividends, interest etc), I don't think the ethical investors will make any difference at all. If prices of the companies that are unacceptable to ethical investors become low relative to companies that are acceptable, non-ethical investors will just move money from acceptable to unacceptable companies. If ethical investors instead invest only in the company or companies they think do the most good (and, for the sake of argument, they all agree what these are), then, if they have enough money to buy the entire stock of that company, they could push the price to more or less whatever level they want. But if they don't have enough money to do that, I don't think they'll make a difference, since, once they've invested all their money in those companies, there will always be non-ethical investors left wanting to sell (if prices are higher than are justified by financial returns), and the only people left to buy will be other non-ethical investors, so the price at which assets will trade will be the financially-justified one.
(3) Ethical investors might be able to influence prices by giving other investors financial incentives to buy or hold ethically-acceptable companies. Perhaps, if it is known that some people are willing to purchase certain assets at higher prices than is financially justified, then other investors will also be willing to hold those assets at somewhat higher prices in the expectation of selling them at an even better level (a version of the 'greater fool' approach – buying an asset that is already overvalued in the expectation that a greater fool will come along to buy it from you at a higher price).
This is more complicated to think through and I'm not sure what the result is. There is an academic literature on asset price bubbles which outlines the ways that prices can deviate from fundamental values, potentially indefinitely, but I don't yet have a good handle on it. In some conditions, it seems plausible to me that the existence of people willing to pay higher prices than are justified by fundamentals will make prices higher than they would otherwise have been. I am not sure about how large this effect would be, how long you could expect it to last for, how far it depends on other investors knowing about the intentions of ethical investors and how far the amount of money being invested ethically would have to increase over time so that there are continually new buyers willing to pay higher prices.
My tentative conclusion is that it is likely that ethical investment can have an influence on prices, but it is probably quite small. Furthermore, it is uncertain what positive effects would follow from increasing the prices of certain companies. It might make it easier for these or other similar companies to raise money in future, but the good done by this would depend on how much more money they raise and what they use this money for. It could also create incentives for owners to make their companies acceptable to ethical investors, but only where the gains in asset prices from doing this outweigh any reductions in profits.
It might be possible to have some rough rules of thumb on positive ways to invest – eg invest money in emerging markets, if you believe that higher asset prices there could support economic growth and therefore higher welfare (just an example, not necessarily correct). If investment decisions on non-financial grounds do have an effect, then you will have done some good, and if not, then at least it will be no worse than investing in anything else, as you'll be investing at the financially justified price. On the other hand, perhaps the fees charged by investment managers, or transaction costs, will outweigh whatever good is done by making these investments.
In any case, it seems unlikely that the welfare consequences of investing in any particular asset in the secondary market are much different from investing in some other asset. If so, it seems a lot more important to explore the welfare consequences of particular primary market investments and donations, where the variance would be much higher. It would be good to have an estimate of the welfare consequences of a random investment into a secondary market investment, for comparison with the alternatives and to factor in to decisions about, for example, whether to save money now in order to donate it later.
I'd be very glad if anyone has any criticisms or something to add.