Have you ever wanted to align your investment portfolio with your fundamental values? If so, it’s easier now more than ever. Some investment companies are making socially responsible investing a popular way for people to find companies that match their values without sacrificing a diversified portfolio.
One drawback, though, is that you could miss out on some great investments if you limit your scope of options. Read on to learn more about socially responsible investing, the pros and cons, and whether it’s right for you.
Why socially responsible investing is relevant today
Social, faith, and environmental issues dominate the political landscape in the U.S., and people are becoming more and more passionate about the issues they care about. Socially responsible investing, also sometimes called impact investing or green investing, allows everyday people to support companies they like based on their environmental impact, corporate governance, or social behavior.
“It’s possible to use your money as a way to vote for the kind of world you want to live in,” said Dave Fanger, founder and CEO of Swell Investing.
Socially responsible investing is important to Millennials
According to a 2018 report by Swell Investing, younger investors are starting to vote with their dollars. Based on this data, 84% of Generation Zers, or people ages 18 to 22, either currently invest in socially responsible investments are plan to in the future. Here’s how the rest of the generations shake out:
While socially responsible investing is starting to become more popular, it isn’t new by any means. In the 1700s, for instance, some church leaders in the U.S. encouraged their congregations to invest in companies that didn’t participate in slavery, alcohol, or war.
Socially responsible investments are not just green investments
But with the rise of the internet, it’s gotten easier to peel back the curtain to see how companies act. Therefore, many corporations are starting to talk more about their core values.
That said, impact investing is a relative term, because everyone has different values and how they choose to act on those values. Plus, there’s no guarantee that you’ll agree with every single thing a certain company does.
“A casino company might do a great job using clean energy and conserving water,” says Fanger. “But is that a responsible company contributing to positive progress in the world?”
So, it’s important to consider what your values are and how investing in this way can make a difference for you.
6 pros and cons of socially responsible investing
The idea of investing in companies that share your same values sounds great, but impact investing isn’t for everyone. As such, it’s essential that you understand both the benefits and the drawbacks of the practice before you start.
Here is a list of the benefits and the drawbacks to consider when looking into socially responsible investing
- You’re walking the walk not just talking the talk.
- You’re rewarding ethical behavior.
- Your investments actually matter.
- Your portfolio performance could suffer.
- You may miss out on big opportunities.
- It takes a lot of time and research.
You’re walking the walk
It’s easy to talk about what you believe in on social media, but it’s a lot harder to actually follow through with your actions. By investing in socially responsible companies that align with your core beliefs, you’re putting your money where your mouth is.
A casino company might do a great job using clean energy and conserving water, but is that a responsible company contributing to positive progress in the world?”
Dave Fanger, founder and CEO of Swell Investing
After all, you may feel like an impostor as an environmentalist if you’re investing in companies that are directly destroying the environment.
It’s also an opportunity to take a stand. Hashtag boycotts may make you feel like you’re doing something. But if you and people like you are actively moving your money away from the types of companies you don’t agree with, it can make an actual impact.
You’re rewarding ethical behavior
As socially responsible investing becomes more and more popular, companies may become more conscious of how their behavior and governance affect their stock price.
It also helps boost companies that do practice ethical behavior. This makes it possible for them to continue growing as a business and staying competitive in industries where ethical behavior may not be generally rewarded.
You’re doing something meaningful
While your current investment portfolio may not keep you up at night, switching to a socially responsible portfolio could help you sleep better at night. Not only will you feel like you’re doing something meaningful, but you could be part of an overall movement to improve the human condition.
Your portfolio performance could suffer
While it’s important to feel good about where you put your money, you could end up with lower returns if you focus solely on ethical behavior above all other investment strategies. Getting lower returns could have negative consequences when it’s time for you to retire or use your investment money for another financial goal.
That’s not to say that you’re doomed to accept lower returns in exchange for investing in ethical companies. It just means that you’ll need to make sure that your portfolio will still be well-rounded and based on your time horizon and risk tolerance.
“Socially responsible investing is still evolving, but if you do your research you’ll find that there are options across all asset classes and sectors,” says Fanger.
So, it’s essential that you design your portfolio to help you achieve both your social and investing goals.
You may miss out on big opportunities
Avoiding investments with big upsides because they don’t meet your ethical benchmarks may end up costing you big time in terms of lost opportunity.
So, consider keeping an open mind when it comes to your requirements. Avoid closing the door on potential investments that could earn you more money and help you do even more good.
It takes a lot of time and research
Corporate marketing is a powerful thing, and you can bet that companies are going to spin everything to make themselves look better. Volkswagen, for example, touted its “clean diesel” cars for years before regulators found out that they were cheating emissions tests.
Even the U.S. Department of Justice got involved, and Volkswagen ended up paying $4.3 billion in criminal and civil penalties for their actions.
As a result, you must research the companies you’re planning to invest in. Look beyond the marketing and fluff and into the company’s actions in the past and see if they match.
How to get into socially responsible investing
Depending on who you have an investment account with, you may not need to move your money at all. Some of the larger brokerages have socially responsible investment funds that you can allocate some of your money toward.
When it comes to socially responsible investing, it’s important to check under the hood”
What does a socially responsible mutual fund look like?
Instead of having you invest in mutual funds or exchange-traded funds, these companies allow you to directly own shares in the companies that you believe in. The firm has several portfolios, including ones that focus on:
- Renewable energy
- Green tech
- Disease eradication
- Clean water
- Zero waste
- Healthy living
“Each company within it actually derives revenue from a product or service that aligns with one or more of the 17 United Nations Sustainable Development Goals,” says Fanger.
Plenty of robo-advisors and low-fee mutual funds have lower costs. But if your top priority is focusing on ethical investments, that may be worth the extra cost to you.
Is socially responsible investing right for you?
Investing in companies that share your values sounds like a win-win situation. But depending on your experience with investing and investment goals, it may not be realistic to have all of your investment eggs in this one basket.
If you choose to invest in companies that are trying to make a good impact on the world, consider using just a portion of your overall portfolio to start. Also, remember that you’ll need to still do your research just like you would any other investment option. “When it comes to socially responsible investing, it’s important to check under the hood,” says Fanger.
There’s nothing wrong with being passionate about clean energy, for example. However, you could do more harm than good if you invest in a company solely based on its clean energy efforts and don’t consider its past performance or any other investment indicators.
In other words, do your best to make sure this is good for your values and your investment balance.
Ben Luthi is a personal finance writer and a credit cards expert who loves helping consumers and business owners make better financial decisions. His work has been featured in Time, MarketWatch, Yahoo! Finance, U.S. News & World Report, CNBC, Success Magazine, USA Today, The Huffington Post and many more.