What does socially responsible investing mean to you? Earlier this year I scratched the surface on what is in reality a vast, and often not very well understood topic.
Depending on who you are and what your investing priorities are, socially responsible investments may refer to renewable energy, sustainable farming, sound corporate governance or something else.
And while the notion of being able to do well by doing good once raised skepticism, businesses and mutual funds are increasingly showing that it’s possible to make money while also adhering to some higher standards.
If you’re serious about putting at least some of your money in socially responsible investments, you should first ask what that term means to you. There are lots of ways of doing good in the world but most businesses that are on this course can be broken down into two categories of helping people and helping the planet.
These two strategies are not mutually exclusive, but for the sake of showing how you can narrow your options, let’s focus on investing in people.
A Calculated Risk
One relatively recent development on this front is that a growing number of companies have opted to pay employees more than the minimum wage. It’s a good example of how some businesses can fairly be distinguished as socially responsible, because payrolls are a major expense for most businesses.
Volunteering to pay workers more than they’re required may be a calculated risk but it’s still a significant risk. Nonetheless, a growing number of companies have headed down this road and seem to be demonstrating that you can pay a living wage and still earn a strong profit.
Here are some of them:
Costco (NASDAQ: COST) – Perhaps the best example of investing in its people, Costco is something of a pioneer in generous employee pay. It has long paid more than the minimum wage to its retail workers and has said the average sales associate now makes more than $20 an hour.
Costco has at the same time consistently generated value for shareholders, with a stock price that has risen more than 150 percent in the past five years. Last year, the company earned a net profit of $3.22 billion, up from $3.05 billion the year before.
Wal-Mart (NYSE: WMT) – Last month the discount retail chain announced it would raise its minimum wage for more than 100,000 workers, with wages now ranging from a little over $9 an hour to just shy of $20. For Wal-Mart, it’s yet to be seen how this will affect its bottom line.
And, while Wal-Mart deserves some credit for increasing its wages, it appears to be more of an incremental increase over existing pay scales than a dramatic hike. Investors will have to take a wait-and-see approach both regarding the extent of its pay increases and the impact on the bottom line. But as the world’s biggest retailer and a frequent trend-setter, it’s a good test case.
Shake Shack (NYSE: SHAK) – At a time that the federal minimum wage is $7.25 per hour, this small chain of burger and shake joints starts its workers at at least $9.50 an hour (more in New York City). It offers unusually broad health-care coverage and 401(k) participation, as well as a kind of profit-sharing where a percentage of top line sales each month is distributed to employees.
Shake Shack may also become an interesting case study on how investors view corporate generosity. For most of its history, Shake Shack has operated as a private company, with more freedom to set its pay policies.
Its first year as a publicly-traded business has been a good one. Shake Shack stock more than doubled from its January IPO price of $21 and now it’s selling around $50. But it has also been increasingly volatile and as investors settle in on the right valuation, the company’s overall expenditures are likely to come into play.
While a growing number of public companies are moving above the minimum wage, the fact remains that many of the businesses that have longstanding policies of high pay for low-skilled jobs – like In-N-Out Burger – are privately held.
But no business ever acts purely out of altruism. If Wal-Mart and Shake Shack and others like them are opting to pay higher wages, it’s at least in part because they think they can follow Costco’s lead and still make a good profit. The jury may still be out on the success of this strategy but a show of investor support will surely help the cause.
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