What is socially responsible investing? Is it a viable investment option? A deeper look into its pros and cons will help us understand the industry better and make informed investment decisions.
Individuals and companies make money in all manner of ways. While some ways may be considered bad by some people, others will see them as normal since what matters to them most are the returns.
However, investment tides have changed over time. Many investors are not only looking for investments that bring them money. They want to invest in a company that will allow them to feel good about what they do, even as they make profits—remember, profits must be considered!
That’s why the new trend of socially responsible investing strategies has gained so much traction over the years. Companies have to balance the need to make money for shareholders while still doing it in a sustainable way.
But does this new trend make any economic sense? Is it even attainable? Well, this piece explores deeper into the various socially responsible investing pros and cons to see if it’s the right type of investment for you.
But first things first!
What is Socially Responsible Investing?
Abbreviated as SRI, socially responsible investing comprises strategies that seek to grow investors’ wealth in a way that is in line with protecting or improving society or the environment. This type of investing recognizes the need for a company to bring about social change even as it strives to make more profits.
SRI is sometimes called social investment, ethical investing, or sustainable socially conscious investing. Generally, SRIs comprise a small percentage of a company’s total invested funds and are also mostly challenging.
Investors who seek to be socially responsible push companies to engage in corporate ethical practices, which promote issues like environmental stewardship, human rights, gender diversity, consumer protection, etc.
For this reason, some socially responsible funds will avoid investing in corporations or companies that encourage the production and sale of alcohol, tobacco, weapons, pornography, fossil fuels, gambling, etc.
The contentious issues that socially responsible investors look at can be summarized under ESGs (environment, social justice, and corporate governance investing).
A socially responsible investment might include stocks promoting green energy, such as solar, wind, or green ammonia. It might also include practices that discourage using fossil fuels, which are responsible for greenhouse gas emissions.
With that in mind, it is now easier to evaluate the pros and cons of socially responsible investing and determine whether it is a worthy investment strategy.
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Who is Socially Responsible Investing For?
SRIs should be for everyone! The planet is ours, and we should protect it at all costs. However, not everyone feels the same way about this ethical investing strategy.
For this reason, an SRI strategy is ideal for those investors who want their money invested in noble causes. These investors look beyond the financial part of the investment into what effect the companies have on society and the environment.
Generally, in socially responsible investments, an investor has two options. One is to avoid companies or funds that produce or promote the use of products that they deem environmentally or socially unfit (e.g., weapons, tobacco, and fossil fuels).
Second, invest in funds or companies that combat social and environmental injustices (for example, companies generating green energy or those fighting racism or gender inequality).
These two options discourage the production and use of products or services that can harm society or the environment. In other words, the investor is making an impact investment.
Therefore, if you are conscious about where your money is being invested and want an investment that offers a sense of fulfillment, SRIs are the investments for you.
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Top Socially Responsible Investing Pros and Cons
There is no investment strategy that is 100% perfect. Each one of them has its advantages and disadvantages. And it’s upon you as the investor to decide whether the good outdos the bad in the investment you wish to make.
After reading this socially responsible investing pros and cons guide, we hope that you’ll be able to make the best decision about your portfolio.
As such, here are the main pros and cons of a socially responsible investment strategy.
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Pros
1. Allows you to Invest in What you Believe In
Some people want to make a difference but don’t know how to. Socially responsible investing is one way to make something count. Instead of just talking about climate change or how alcohol is ruining families and the young generation, you can now do something about it.
Also, for many investors, personal values are quite important. If an issue bothers you, such as gender violence, racism, or deforestation, you can invest in companies or funds whose portfolios tackle such issues.
For instance, investing in companies that promote gender equality and sustainable living is a great fit. You can’t advocate for a clean, emission-free environment while you still invest in companies that destroy forests or use too much fossil fuels.
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2. Allows Investors to Reward Ethical Companies
Your investment might seem like a drop in the ocean, but cumulatively, it can go a long way in changing the world. For instance, the more investors invest in an ethical company, the stronger it grows and the more initiatives it takes to handle contentious issues.
On the other hand, investing in socially responsible companies means you are preceding companies that you consider unethical. The more people who do this, the more capital-deprived such companies will be. In the long run, more companies will join the sustainable route, creating a bigger impact on the planet.
A practical example of such a scenario is the termination of the partnership between Shell Oil and Lego some years back. Lego ended its contract with Shell Oil, aiming to become more environmentally friendly in its operations.
They have partnered with socially responsible companies such as the World Wildlife Foundation to promote conservation and other social initiatives. Lego is also committed to achieving 100% renewable energy production capacity to reduce its carbon footprint.
If investors don’t invest in companies like Lego, their efforts towards promoting a cleaner future wouldn’t be possible.
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3. Gives you a Sense of Fulfillment
Socially responsible investing gives investors a sense of doing something right. This gives them peace of mind and a greater zeal to invest more.
Generally, when you invest in SRIs, you are doing so because of your values and the need to see a better society/environment. Accomplishing this will certainly make you feel proud of yourself even when the changes in what you are fighting for are not too evident.
The advantage of SRIs is that you are not just investing your money to help make society better. You are doing so while your pockets are also rewarded with good profits.
It is a win-win situation. You make money and enjoy the most rewarding feeling of doing something good for the world.
Some people might say this strategy is not profitable, but this couldn’t be any further from the truth. Sustainable companies and funds are making good money for their investors, and the future is anticipated to be even better.
Research shows that more people, around 66% globally, are willing to buy sustainable goods. This is a clear indication of the future. Socially responsible investments might become investors’ gold mines.
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4. Helps you in De-Risking your Portfolio
More companies have realized the need for SRI strategies. They have realized that SRI is not only meant to make a company look good in the eyes of investors. Rather, it might become quite important for the business’s survival.
For this reason, the future might include more companies investing in socially responsible activities. And if this happens, making socially responsible investments now might help you avoid the risk of losing money in some years.
If the current trend is anything to go by, future investments might be more inclined towards environmental, social, and governance (ESG) investments. Sustainability will be more than just being green and ethical.
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5. Allows you to Invest According to your Values
What is more important than being able to invest based on your principles and values? If you believe that tobacco is harmful or that weapons production should be banned, why should you continue investing in companies that support such activities?
Socially responsible investing allows you to have a choice. That’s right! You can now invest in firms or companies that align with your core values. For instance, most investors are seeking investment opportunities that help them reduce their carbon footprint.
Investing in companies or funds supporting green or recyclable energy is among the great alternatives investors are taking. Therefore, if your values prevent you from investing in a certain company, you can seek investment management advice when creating your portfolio.
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6. Helps Bring Desirable Change on the Planet
We keep talking about climate change, global warming, and sustainability. But have we ever thought about how our small actions can change this? Our contribution might seem small and negligible, but the effects start to be seen when more investors join hands.
For instance, if fewer guns were manufactured, fewer would reach our neighborhoods, making them safer for future generations to live in.
Also, have you considered war’s devastating effects on any country? The aftermath of what these weapons do can be devastating. We will promote a better, safer world if something can be done about this.
Additionally, if alternative fuel sources to fossil fuels were found and harnessed, our world would become cleaner and free from carbon emissions, whose effects are more than devastating.
Ultimately, SRIs can be the beginning of the ideal world.
See related: 6 Reasons Why Gender Equality is Important
Cons
1. You Might Forego Greater Investment Opportunities
When focusing solely on socially responsible investing, you could be leaving behind other investment opportunities, offering better returns. For instance, a company might not be too much into socially responsible investing, but their products and services can help you make good money.
If you don’t take advantage of such an opportunity because the company’s social responsibility falls below par, you might miss out on a lucrative deal.
In other words, many companies out there whose social responsibility efforts aren’t anything to brag about but offer quite lucrative returns for investors. So, even as you make your investment choices, consider all angles.
See Related: Ethical Dividend Stocks to Invest in Today
2. Limited Investment Opportunities
You might not have many options since you want to build your portfolio on socially responsible stocks or funds. This is because most companies fall on the other side. This is not to say that they do anything wrong, but their efforts on the topic might not be as extensive.
For this reason, it may become harder to build a portfolio that offers lucrative returns opportunities, as you will be preceding most companies’ stocks or funds.
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3. Not all Companies or Funds are what they Are
Now, this one is quite common. Many companies will claim to be socially responsible, but in the real sense, they are not. Their social responsibility activities are just marketing stunts for the public eye and avoiding criticism.
In this light, you might think that you are engaging in socially responsible investing, but in reality, you are no different from the rest of the investors.
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4. Ethics Might Overshadow the Performance
Even as we make socially responsible investments, the performance of a company or fund is crucial. Everyone needs good returns on their investment money.
Sometimes, companies might focus too much on social responsibility at the expense of performance. In this case, the investors tend to lose.
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Examples of Social Responsible Investing
1. Socially Responsible Investing Mutual Funds and ETFs
Socially responsible investing mutual funds and ETFs come in several categories. While some will avoid investing in companies connected to controversial products and services like weapons, gambling, tobacco, fossil fuels, or alcohol, others will expand their reach to cover ESG issues.
Currently, numerous mutual funds and ETFs use the ESG principles. If you want to find out all the available socially responsible funds, the US SIF’s website gives you access to over 200. It offers data about these firms’ financial performance and SRI strategies.
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2. Alternative Investments
Just as the name goes, they are alternatives to traditional investments. These include various options such as hedge funds, property funds, etc. They are also immersing themselves in the SRI industry.
A report by the US SIF shows that the rate at which alternative investment funds join the SRI game is steadily growing. All you need is to find the best investment options, and you are good to go.
3. Impact Funds
Impact funds are simply an extension of ESG funds. The funds take care of all ESG issues and don’t stop there. They also care about performance in the same measure.
This means that even as a company focuses on social responsibility and ethical changes, it also ensures that investors are rewarded. Impact Funds are ideal for investors who want a piece of both sides—making an impact on society and on their wealth creation.
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4. Community Investments
Community investments are an excellent choice for investors looking to effect positive changes in society with their investments. These investments allow investors to lend money directly to various community support organizations.
An excellent way to do this is by investing in CDFIs (community development financial institutions). These include banks, loan funds, and credit unions that offer loans and financial support to low-income or marginalized communities. To find the best CDFI banks, visit the National Community Investment Fund’s website.
5. Faith-Based Funds
These are investment opportunities mainly based on certain faiths. They can support the Islamic faith, Christianity, Catholic values, etc.
Such funds only choose companies that support the specific faith or values. If a company doesn’t adhere to these values or faith requirements, it can’t be featured in the fund.
6. Microfinance
Lastly, if you want to invest your money where it can have a great impact, Microfinance can also be an excellent choice. Microfinance offers micro and small loans to small and startup businesses, thus improving the livelihoods of low-income communities.
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