Money Stuff: Someone Is Going to Drill the Oil

Programming note: Money Stuff will be off tomorrow, back on Monday.

A useful framework for socially responsible investing, one that I get mainly from Cliff Asness, is that the point of it is to raise the cost of capital of bad stuff. If lots of people decide that something is bad and they shouldn’t invest in it, then companies that do the bad thing will have a harder time raising capital and will have to pay more to attract investors; it will be more expensive to do the bad thing, so there will be less of it. The corollary to this is that, if you raise the cost of capital of the bad stuff, the returns to people who do invest in the bad stuff will be higher, because that’s just what “cost of capital” means. (A company’s cost of capital is the expected returns of the people who invest in it.) If you invest in socially responsible things, you create higher returns for people who invest in socially irresponsible things, and you forego those returns for yourself. Which is fine because you aren’t just in it for the returns; you want to make the world better, too.