I’ve heard of some investors allocating a small percentage of their portfolio towards highly speculative “moonshot” style investments. The logic being that it’s impossible to ever accurately forecast how some types of investment, such as start-up companies, will perform in the longer term, but that they carry the potential to offer outsized returns.
What are your thoughts on treating charitable donations similarly? For example, giving ~95% of your donations to charities for which there is a strong evidence base to back up their efficacy and giving the remaining ~5% to “speculative” style charities for which there is less objective evidence?
If you had to choose a “speculative” charitable cause, what would it be?
The argument isn’t necessarily that investing in ESG funds leads to a positiveimpact, so much as that it avoids a negativeone. For example, consider two hypothetical investment funds:
Invests in the S&P 500 index
Invests in the S&P 500 index but excludes any company which manufactures or supplies landmines
All else being equal I think it’s difficult (although not impossible) to argue that shifting people away from fund 1 and toward fund 2 doesn’t have a net positive impact on the world. So I suppose the debate hinges primarily on whether all else is equal (i.e. in terms of fees, risk, and expected growth) and, if not, how to account for those differences within an ethical framework.
I agree with the criticisms you made but would add that some people who are uninterested in the EA maxim of “do the most good” may be convinced to “do the least harm”. If these people (who won't be donating their investment gains to effective charities, regardless of how large those gains are) can be nudged towards more ethical products then this could have give a positive benefit.
I'd also add that there are plenty of situations where individuals are required to disperse funds which have already been earmarked for spending on a particular cause. For example, many large businesses have staff "LGBT+ inclusion committees" and provide funds which these committees are expected to donate to LGBT+ charities.
In this situation, whether or not charities focussed on improving the lives of LGBT+ people are more or less effective than others is irrelevant. The funds are earmarked for that purpose and so the task of the committee members is to determine which charities that fall under their remit are most impactful.
If discussion relating to how to do so is not welcome and encouraged in EA spaces then there is a risk that such evaluation won't take place at all.
Although it's a bit tangential to the main point of the post, I'd be interested to hear what interventions the anti-alcohol activist proposed to help "[reduce] social expectations of drinking".
Is there anywhere I can read more about such proposals?
To clarify, when I mentioned that FIRE enthusiasts are “likely to take a more active approach to selecting their own investments” I didn’t mean to imply that they will be selecting actively manged funds. But, I agree that I could have worded this better.
Using the standard method of saving for retirement employed in the UK as an example (purely because it’s the one I’m most familiar with): most people here have what’s known as a defined contribution pension, whereby their employer pays a percentage of their salary into a pension in their name (and, in most cases, employers are legally obligated to do so). In practice, a “pension” is nothing more than a tax advantaged account which houses some form of investment fund.
Employers are the ones who select a pension provider for their employees and will generally rely on these “experts” to recommend a default investment fund for their employees’ retirement savings. Unsurprisingly, most pension providers recommend one of their own actively managed funds, which allows them to charge a fat ongoing management fee.
When I say that individuals pursuing FIRE generally “select their own investments” I’m referring to the fact that they usually choose funds themselves rather than sticking with the default option offered by their employer. As you say, they take steps to minimise the fees they are paying and generally opt for globally diversified, passive index tracker funds.
I think it’s fair to say that large parts of the investment industry are guilty of employing jargon and presenting their products in needlessly complex ways to discourage retail investors from attempting to understand how their money is invested and whether the fees they pay are reasonable.
While I’m of the belief that selecting an appropriate investment fund can be much simpler than most people assume, I will also concede that doing so does require a bit of specialist knowledge. For example, to select an appropriate passive fund, those in the FIRE community will need to consider factors such as equity/bond ratios, whether the S&P 500 is sufficient (or if they want more global diversification), if an “all world” index fund is appropriate (or whether they want small cap stocks included), etc.
If those pursuing FIRE wish to retire before they reach the age at which they are able to access the funds held within their pension, they will also need to hold sperate investments and so will generally need a strong awareness of any taxation which will be applicable to these. Only by taking tax into account will they be able to optimise and structure their investments appropriately (e.g. capital gains and dividends are taxed differently in many jurisdictions).
In saying all of this, I would like to amend the point I made about ESG funds generally having higher fees than non-ESG funds. While it is true that passive ESG funds generally have higher fees than other passive funds (and actively managed ESG funds ordinarily have higher fees than average actively managed funds) there are plenty of passive ESG funds with lower fees than standard actively managed funds.
As such, most employers (in the UK, at least) have an opportunity to save their employees significant amounts of money while also moving them to more ethical investments. Given that the board level employees responsible for selecting company pension schemes (presumably Chief Financial Officers?) are likely to have their own pensions invested in these funds, they have significant personal incentives to do so.
In terms of opportunity for EA activism, interventions to encourage employers to make such a switch could be highly impactful. Given the boards of large companies are likely to include individuals with knowledge of investments, chartered accounting qualifications and the like, they should be able to grasp the benefits of switching to cheaper, passive ESG funds easily. I can’t think of many other situations where a small number of people have the capacity to reallocate vast sums of other people’s money away from harmful industries.
I’ve heard of some investors allocating a small percentage of their portfolio towards highly speculative “moonshot” style investments. The logic being that it’s impossible to ever accurately forecast how some types of investment, such as start-up companies, will perform in the longer term, but that they carry the potential to offer outsized returns.
What are your thoughts on treating charitable donations similarly? For example, giving ~95% of your donations to charities for which there is a strong evidence base to back up their efficacy and giving the remaining ~5% to “speculative” style charities for which there is less objective evidence?
If you had to choose a “speculative” charitable cause, what would it be?
The argument isn’t necessarily that investing in ESG funds leads to a positive impact, so much as that it avoids a negative one. For example, consider two hypothetical investment funds:
All else being equal I think it’s difficult (although not impossible) to argue that shifting people away from fund 1 and toward fund 2 doesn’t have a net positive impact on the world. So I suppose the debate hinges primarily on whether all else is equal (i.e. in terms of fees, risk, and expected growth) and, if not, how to account for those differences within an ethical framework.
I agree with the criticisms you made but would add that some people who are uninterested in the EA maxim of “do the most good” may be convinced to “do the least harm”. If these people (who won't be donating their investment gains to effective charities, regardless of how large those gains are) can be nudged towards more ethical products then this could have give a positive benefit.
Completely agree.
I'd also add that there are plenty of situations where individuals are required to disperse funds which have already been earmarked for spending on a particular cause. For example, many large businesses have staff "LGBT+ inclusion committees" and provide funds which these committees are expected to donate to LGBT+ charities.
In this situation, whether or not charities focussed on improving the lives of LGBT+ people are more or less effective than others is irrelevant. The funds are earmarked for that purpose and so the task of the committee members is to determine which charities that fall under their remit are most impactful.
If discussion relating to how to do so is not welcome and encouraged in EA spaces then there is a risk that such evaluation won't take place at all.
Although it's a bit tangential to the main point of the post, I'd be interested to hear what interventions the anti-alcohol activist proposed to help "[reduce] social expectations of drinking".
Is there anywhere I can read more about such proposals?
Thanks for the feedback!
To clarify, when I mentioned that FIRE enthusiasts are “likely to take a more active approach to selecting their own investments” I didn’t mean to imply that they will be selecting actively manged funds. But, I agree that I could have worded this better.
Using the standard method of saving for retirement employed in the UK as an example (purely because it’s the one I’m most familiar with): most people here have what’s known as a defined contribution pension, whereby their employer pays a percentage of their salary into a pension in their name (and, in most cases, employers are legally obligated to do so). In practice, a “pension” is nothing more than a tax advantaged account which houses some form of investment fund.
Employers are the ones who select a pension provider for their employees and will generally rely on these “experts” to recommend a default investment fund for their employees’ retirement savings. Unsurprisingly, most pension providers recommend one of their own actively managed funds, which allows them to charge a fat ongoing management fee.
When I say that individuals pursuing FIRE generally “select their own investments” I’m referring to the fact that they usually choose funds themselves rather than sticking with the default option offered by their employer. As you say, they take steps to minimise the fees they are paying and generally opt for globally diversified, passive index tracker funds.
I think it’s fair to say that large parts of the investment industry are guilty of employing jargon and presenting their products in needlessly complex ways to discourage retail investors from attempting to understand how their money is invested and whether the fees they pay are reasonable.
While I’m of the belief that selecting an appropriate investment fund can be much simpler than most people assume, I will also concede that doing so does require a bit of specialist knowledge. For example, to select an appropriate passive fund, those in the FIRE community will need to consider factors such as equity/bond ratios, whether the S&P 500 is sufficient (or if they want more global diversification), if an “all world” index fund is appropriate (or whether they want small cap stocks included), etc.
If those pursuing FIRE wish to retire before they reach the age at which they are able to access the funds held within their pension, they will also need to hold sperate investments and so will generally need a strong awareness of any taxation which will be applicable to these. Only by taking tax into account will they be able to optimise and structure their investments appropriately (e.g. capital gains and dividends are taxed differently in many jurisdictions).
In saying all of this, I would like to amend the point I made about ESG funds generally having higher fees than non-ESG funds. While it is true that passive ESG funds generally have higher fees than other passive funds (and actively managed ESG funds ordinarily have higher fees than average actively managed funds) there are plenty of passive ESG funds with lower fees than standard actively managed funds.
As such, most employers (in the UK, at least) have an opportunity to save their employees significant amounts of money while also moving them to more ethical investments. Given that the board level employees responsible for selecting company pension schemes (presumably Chief Financial Officers?) are likely to have their own pensions invested in these funds, they have significant personal incentives to do so.
In terms of opportunity for EA activism, interventions to encourage employers to make such a switch could be highly impactful. Given the boards of large companies are likely to include individuals with knowledge of investments, chartered accounting qualifications and the like, they should be able to grasp the benefits of switching to cheaper, passive ESG funds easily. I can’t think of many other situations where a small number of people have the capacity to reallocate vast sums of other people’s money away from harmful industries.