Invest well; do good
Socially responsible investing is a great idea in theory but difficult in practice. I’ll explain why. But first, what is socially responsible investing?
It generally takes one of two forms:
- You exclude companies from your investment portfolio that trip your negative criteria.
- You include companies in your investment portfolio that meet your positive criteria.
There is no standard set of these selection criteria as they are based on your moral compass. Traditionally, they are related to political, environmental, social justice, and workplace rights issues. This socially responsible investing approach is also sometimes referred to as ESG — environmental, social, and governance.
What are some considerations when choosing ethically-informed investing?
- Judging corporate behavior is tricky.
For example, what if you object to a company’s military business but they are responsible stewards of the environment? What if they sell life-saving miracle drugs but at unaffordable prices? What if they connect the world with free social networking services but creepily invade your privacy? What if their services are socially benign but their CEO actively supports racist political leaders? Things can get muddy.
- As companies’ strategy and leadership evolve, you will have to regularly re-assess the social responsibility status of your portfolio and that may mean frequent monitoring and trading of your investments.
- Researching bonds and international stocks is more difficult and expensive.
- With tight screening requirements, you may end up with a small investment universe and face lower returns, higher risk, or both.
- You may also incur additional fees to adopt this approach.
- Lastly, there is no evidence that socially responsible investing has any effect on corporate behavior or social change.
We should all want to make the world a better place but your investment portfolio may not be the most effective channel. Consider a different path to express your conscience and social preferences.
Be a low-cost index fund investor, but a socially active citizen. You should expect slightly higher returns due to the lower fees and broader investment universe. Then, support the organizations whose missions you value by donating directly to them and/or organize consumer boycotts against companies you oppose. You will have a greater impact and more cost-effectively advocate for the social change you desire.
Update: Vox weighs in on their view of ethical investing here.