A correspondent asked:
I’d like to invest my funds in an ethical manner; should I consider socially responsible investing?
Mindful in Minnesota
Socially responsible investing is a great idea in theory but difficult in practice. I’ll explain why.
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.
What are some considerations when choosing ethically informed investing?
- Judging corporate behavior can be 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 prices that are unaffordable? What if the company’s free social networking services connect the world but creepily invade your privacy? Things can get muddy.
- You will have to regularly re-assess the social responsibility status of your portfolio and that may mean frequent trading of your investments.
- With tight screening requirements, you may end up with a small investment universe and face lower returns, higher risk, or both.
- Researching bonds and international stocks is more difficult.
- You will incur additional expense 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.
Rather than screening your investment portfolio, stick with low-cost index funds. You should expect slightly higher returns due to the lower fees and broader investment universe. You can then donate the difference directly to the organizations that are most important to you. You will have a greater impact and will cost-effectively advocate for the social change you desire.
Questions about your approach to investing your savings? Get in touch.
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