Costs and Benefits of Meritorious Actions

A couple of weeks ago, Heather Gillers reported in the Wall Street Journal that the well-regarded California Public Employees Retirement System (CALPERS) is reconsidering its acclaimed practice of investing for social good following the theory of socially responsible investment.

CALPERS directors are keeping their ownership shares in private companies which run prisons, sell guns or have business links to Turkey (to protest that country’s lack of recognition of the Armenian persecutions 100 years ago) because of the potential for losing needed revenue with which to pay retirees or because of uncertainty about the beneficial effects of such disinvestment.

Underfunded public pension funds across the U.S., short some $4.2 trillion in assets necessary to earn enough money to pay promised pensions, are also thinking about their responsibilities.

On the one hand, they have a conflict between two different standards of merit: one is financial – earning money for beneficiaries and the second idealistic – promoting social good for third parties.

On the other hand, the micro-economic realities of marginal utility curves create their own moral imperatives. When you are flush with money, using some of it for social good does not come at a high cost. But when funds are low, the marginal utility of each additional dollar spent is high. The opportunity cost of not spending it on something else is significant. How, then, should your seeking to do good be balanced against using the dollar prudently to increase your assets?

When is the accumulation of assets for those who depend on them a higher social good?

CALPERS Chief Executive Marcie Frost said “With a targeted return of 7%, we need access to all potential investments across all asset classes. Divesting does the exact opposite – it shrinks the investment universe.”

Just as they teach in Economics 101: you can’t have it all; there is no free lunch; everything comes at a cost; choices must be made.