I have plenty more ranting to do on the Straw Ratio, but apparently blogs are supposed to discuss current events or something, and the big story in charity blogging (yeah, charity blogging is a thing–I knew it wasn’t going to take much more time to get going than food blogging) is “social investing.” Specifically, the LA Times articles that accuse the Gates Foundation of contradicting good works with evil investments.

Here’s my summary of the debate: some people are upset that the Gates Foundation isn’t going to make any changes, and others claim that a foundation can’t make these kinds of “judgment calls” (which seems like a bizarre claim to me–what exactly are they supposed to be doing in picking grant recipients?)

The first thing I want to point out, which I haven’t seen acknowledged enough, is how extremely, extremely minor the impact of a foundation’s investing decisions are on the companies it invests in. It’s one thing if it’s doing private equity and helping a startup, shoestring baby-eating venture to get off the ground; that would be socially irresponsible investing. The much more common situation is that it’s holding a bunch of publicly traded stocks. The stock price impact of pulling out their money, even for a behemoth like the Gates Foundation, would be tiny, and any price impact they did create would be partly offset by other investors jumping in at the lowered price.

This isn’t even mentioning the indirectness of the link between a company’s stock price and its ability to carry out its activities. An extreme example of this is the one kind of company the Gates Foundation does divest from, tobacco. Tobacco companies are generally not seeking capital to expand their activities, so investing or not investing in their stock has literally no impact whatsoever on what they do. Buying their stock is buying a slice of their profits, not contributing to them. Saying you shouldn’t invest in Altria because smoking is bad is almost exactly equivalent to saying you shouldn’t bet on the Colts to win the Super Bowl because they’re annoying.

Still, indiscriminate investing can mean that (a tiny bit) more capital goes to irresponsible ventures. So should foundations be worried about this? Generally, I’d say no–not because it isn’t relevant, but because foundations’ resources are better spent elsewhere.

Let me use a nonsensical example. If the Giving Hope to Babies Foundation wants to give hope to babies, it should be doing whatever gives babies the most hope per dollar, net. This probably means spendings all its resources to find and fund a few extremely effective activities (say, showing Braveheart in maternity wards). It wouldn’t make sense for it to demand that the people who sell it electricity, rent out its building, deliver its packages, etc. are all people who never discourage babies–this would be a lot more money and hassle for very small, scattered improvements, and the resources would be better used for more Braveheart screenings. And likewise, it wouldn’t make sense for it to spend resources on consistent investing, weeding out all the baby-demoralizing companies from the standard stock indices it’s holding. It’s better off using a simple, cost-effective investment strategy and using the savings on its core Braveheart-showing programs. I see I’ve lost you.

That said, I think the Gates Foundation is an exception, because:

1. They are really enormous, and they are probably hurting for things to spend their money on. Seriously. Unlike most foundations, they recognize the silliness of giving money away less quickly than possible, and yet they’re still giving it away at a slow rate (~5% of assets per year).

2. They are a leader, and if they did a good job developing a “socially responsible investment index,” many others would leverage their work.

3. If this index were constructed using clear, consistent guidelines, we might actually start to see an impact, in that businessmen would know that violating the guidelines will mean more difficulty raising capital.

Because they’re a leader and because they’re huge, the Gates Foundation has a chance to set the standard for socially responsible giving. That would matter, and if the index were well constructed, it would discourage “evil investing” enough to start discouraging “evil entrepreneurship” as well, which is really what matters. The good this would accomplish might be comparable to what they could accomplish by spending the money on other things. But this tradeoff is highly debatable, and for smaller, less influential foundations, I think it’s clearly a better move to just invest for results.

This all might seem pretty irrelevant if you’re not a gigantic foundation with loads of money to invest well or evilly. Here’s what’s relevant: division of labor. It’s way less effective to try to do everything perfectly than to pick something that you can do really well, do it, and outsource all the other crap to others. That’s why Ford doesn’t make their own steel and I don’t do my own laundry. And that’s why I’m generally pretty unenthused about–and often against–both “responsible investing” and “responsible consumerism,” stuff like Fair Trade coffee. People should buy their favorite products and give to their favorite charities, rather than spending extra money on products that are “made without evil.” Avoiding the bad isn’t nearly as effective or important as identifying and supporting the best (… so … GiveWell is awesome). This post is already long, so I’ll be more convincing about this some other time.