I see where you're coming from, but I see 3 advantages to paying for results. (1) This approach involves facing head-on the challenge of determining whether a charity is effective, which may be hard but is surely vitally important to answer. (2) It creates incentives for charities which are already effective to become even more so. (3) It could help to foster a system of charitable funding in which money goes to effective charities, not because experts have examined how they function and concluded that they work well, but just through the feedback processes which reward effective and punish ineffective charities. When charities operate in complex environments where the consequences of their activities are not always easy to predict, this sort of system might do better than expert evaluation.

Yes, the first idea is what I had in mind. The problem with getting financing in order to achieve results has a few possible solutions, I mention some below in the response to Kawoomba. Which other problems did you have in mind?

The advantages seem to me to work at various levels – improved incentives, much improved knowledge, and the possibility of a system emerging where you can leave it to the financial incentives and the feedback processes they create to bring about increased effectiveness and innovation.

I'm not sure if this is a disadvantage or an advantage. I think it might be a good thing if people starting charities thought more about what confidence they had in how effective their activities would be, rather than simply having good intentions and an idea of how they might be able to fulfil them. I'd be happier giving my money to a charity whose founders stood to lose something themselves if their work turned out to be ineffective, and welcomed the chance to prove their effectiveness one way or the other. However, I agree that people are often too risk-averse and that there might well be a need for charities to be able to share some at least of the risk with lenders who had social as well as financial goals.

Yes, it's thinking about social impact bonds and the like that started me thinking about paying charities for results. What I would note, though, is that, at the moment, individual donors/investors can invest in social impact bonds. What they cannot do is offer money for the payouts to investors in social impact bonds. So, you can put money into a bond which pays out if charities are effective at, eg, reducing the number of children who go into care homes in the UK. (this is a real example). But you'd only want to do that if you were confident that the charity was effective, otherwise you'll both lose out financially and have achieved no good. I'd be more interested in adding money to the fund which pays out for results I care about, thus giving investors who might have a better idea of what is and isn't effective incentives to put money into the charities they think will produce good results.

I definitely agree that financing charities is an issue, but there are various possibilities. You could finance them through donations for a few years while declaring that, from x years time onwards, your funding would depend on the results obtained using the money you donated; from that point on, the system would be self-sustaining for effective charities, and not for ineffective ones (which would be, I think, a good thing). Or they could borrow money from lenders who want to support charitable causes and are willing to lend at lower interest rates, or through a social impact bond structure where lenders provide money in return for some or all of the future results-based payments should the charity be effective. Or, finally, through borrowing at market rates, though I agree that this is likely to be uneconomical, at least until there is more evidence for judging which charities are likely to be able to produce good results and repay the money they borrow.

I agree that having a good control group would be very important. I also agree that for many charitable activities this would be impossible. However, in many other activities, it would be possible. A good number of randomized controlled trials are being run to measure the effectiveness of health, educational and even political/governance activities, so they can be done. They might be costly, but that's a separate question, and, as I said, there could be very large benefits in improved knowledge from doing them.

I think your scam analogy is somewhat off-target. A closer analogy would be that, for donations at the moment, they ask you to send $50 and don't offer any refund if your child is rejected. You just have to trust them, or examine them closely enough, to be confident they are doing something effective. A payment for results arrangement with a badly constructed control group might be like your analogy, but even this might be some sort of improvement, because there is now at least an incentive to reduce the number of rejections, even if some of the money is going for things that would have happened anyway. And, with a good control group, you would only be paying for things you could be confident were the results of the charity's activity.

Fair question, and I should have been clearer, because the meaning is ambiguous. I would say 'ethical investment' has two main meanings: 1) investing money taking into account the ethically-significant consequences of your investment decisions. 2) making investments in the secondary market which avoid companies whose activities seem socially harmful (usually understood to mean companies involved in things like weapons or tobacco) and/or put money into companies who activities seem socially beneficial (usually understood to mean companies involved in things like clean energy or with strong policies on workers' rights or equal opportunities).

I think ethical investment (1) is very much worth thinking about, because a large amount of the influence that most people in richer countries have upon the world is mediated by what they do with their money (spending, investing, donating). My post was about whether ethical investment (2) can be a part of ethical investment (1), and my tentative conclusion is – not really. However, I would say that most people's understanding of ethical investment is ethical investment (2). Trillions of dollars are invested in funds committed to such policies, which suggests to me that many people think they are effective, especially since some of them pay management and other fees to invest in such funds which they could avoid by just investing in some sort of index fund.

I completely agree that it is not at all obvious what good and bad effects there are of companies' activities. I think it is very possible that some 'unethical' activites have more positive effects than many activities commonly understood as ethical. It would take a lot of reflection to work out what good and bad effects certain companies have. The point of my post was to ask, before engaging with this question, whether individuals' decisions about their investments in the secondary market have much or any influence on companies. If not, it's not urgent to think through the question about how much good various companies do, at least in terms of what influence this should have on your investment decisions.

This may have been obvious to many people from the start, but it wasn't to me.

'I think it's possible to create genuine incentives for companies to act more ethically if you have a large amount of money to allocate (preferably many billions)'

-'Assets in socially screened portfolios climbed to $3.07 trillion at the start of 2010' So there are already billions invested there. However, it's questionable what is ethical about these investments. First, billions or even trillions might not make much of a difference to prices, according to the logic of the argument I gave above. Second, these funds' criteria about what is ethical are open to question. Third, even if money invested in them makes a small difference, you also end up paying various management and other fees which might be close to wasted money, when you could instead invest directly and, say, give the money you save to charity.

I think it's worth clarifying whether or not there's anything ethical about ethical investment as currently practised, and, if not, what real ethical investment would be. There are already some movements towards this, eg impact investment, although I'm not sure there are yet convincing answers.

'Of course, unless you think you might be able to start a movement towards more people supporting ethical investment, or you're actually a billionaire, chances are your personal impact would be minimal.'

-I'm not certain what you mean by 'minimal'. It could mean two things which are often not distinguished but I think should be. If my $1,000 has a millionth of the impact of someone else's $1 billion, well, that's fair enough, it's a million times less money. I wouldn't see this as a minimal effect; it could be the maximum difference I can make given my resources. Or you could mean that my $1,000 makes no difference at all, whereas over some cut-off point - $1 million, $1 billion or whatever - it would start to make a difference. This is possible but one would have to explain why.

-Even if ethical investment has no different effect from any other type of investment, investment per se might have welfare consequences, in raising the total amount of money available for investment globally.

-I don't think there's much doubt that ethical investment is part of a wider set of attitudes which have led many companies to some combination of changing their policies and changing their self-presentation to fit better with common ideas of what ethical and unethical practices are. Large amounts of money in ethical investments may powerfully signal to companies that they should respond to the attitudes expressed in those investments even if there is no direct effect on asset prices.

I have doubts about how much difference this has made, although I am very uncertain and don't know enough about it. The first doubt is about how far companies have changed their practices rather than just their self-presentation. The second doubt is over how far the changes they have made are in fact changes for the good. eg it could be the case that higher wages and better working conditions for people in poorer countries leads to fewer people there being employed (I don't know if this is the case, it's just an example)

'supporting charity is almost certainly more directly beneficial, simply because the primary aim of charity is to help people, while the primary aim of investment is to generate returns'

-I don't know if we agree or disagree here. I think the fact that the primary aim of charity is to help people does not make it almost certainly more beneficial. People working in and donating to charities might have false beliefs about the good that charitable work does. If no-one actually knows what good a charity does, and no feedback mechanism exists to put an end to charities that do harm or no good (since, eg, the people served by the charities are totally disconnected from the people who fund them), there is no reason why many or most charities could not be totally ineffective or harmful. The pursuit of returns, on the other hand, could be a powerful force driving companies to be beneficial if they generate those returns only by offering people things they value enough to pay for. I think you might agree with me given your comment that investment might be more beneficial in the long-term.