In today’s socially conscious culture, everyone wants to demonstrate their values. We see it most on social media: people’s posts reflect their values all the time whether with political memes or fundraising efforts or even cat videos.

What is socially responsible investing?

The financial planning process is no different. Clients often have values they want to reflect in through how they spend, save, and invest. This brings us to the strategy of socially responsible investing, or “SRI”. Sometimes also called “ESG”, or Environmental, Social and Governmental investing, socially responsible investing is the practice of investing according to a certain code of “ethics”. What is socially responsible investing? The definition of SRI can be quite broad despite its concentration in these three major areas.

The dilemma I see with socially responsible investing is that it can be very subjective. To one person, being a socially responsible investor may mean not owning any companies that sell or make tobacco, alcohol, or firearms; to another, it might be not owning any companies that don’t responsibly manage their water usage. There are many different angles from which you can think about socially responsible investing; it just depends on your personal values and how you want to see them enacted.

…and what are the practical considerations?

Another issue is that SRI sounds great on the surface – you’re making money while supporting an important cause. What could be better? But socially responsible investing also comes with many practical considerations and trade-offs that can impact your financial success. Below are a few to consider:

• • Even though SRI has been around for some time, doing good research on your potential investments can be limited. It’s surprisingly difficult to find a variety of investment fund options for socially responsible investing, and the data on them is equally elusive.  For instance, do you sacrifice investment performance by investing in SRI funds? 

• • Sometimes the funds that are available are illiquid (meaning that you can’t trade many shares of the fund or you can’t sell them at the price you want), small, or without a track record. These factors, while not in and of themselves a bad thing, are not great characteristics for a good investment as they tend to create distortions. Unless you’re doing a lot of research on the topic, funds like these are best avoided.
  • You might find that an “SRI” or “ESG” fund is concentrated in a sector that creates a lot of risk in your investment portfolio. Take a Solar or Clean Energy Fund — these economies still have an unclear future, and that can spell disaster for your investment returns. Be careful that your portfolio isn’t all in one area just for the sake of doing good.

When it comes to socially responsible investing, practicality should go hand-in-hand with your idealism. Having the facts will help you understand the benefits and trade-offs you need to achieve the right socially responsible strategy for you. It is possible to do good AND secure your financial future at the same time; it just takes more research and a conversation with your friendly financial advisor. Don’t hesitate to reach out with your thoughts and questions!

Here are a few resources to investigate the topic further: The Forum for Sustainable Investing.

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