Socially Responsible Investing: Pros and Cons

Apr 26, 2021 2 min read

While it’s easier than ever to align your financial portfolio with the causes you care about, there’s one big question: Does socially responsible investing make financial sense?

Just like with any type of investment, the answer is a complicated one: It depends. For every study showing ethical investing is more effective in the long run, there’s another to refute it.

Let’s review what socially responsible investing is and consider a handful of socially responsible investing pros and cons.

What Is Socially Responsible Investing?

Simply put, it’s the practice of investing in companies and funds that have positive social and societal impacts. This can include supporting individual companies, and socially-conscious exchange-traded funds (ETFs) or mutual funds.

In general, companies included in SRI funds are done so based on environmental, social and governance factors. Think worker compensation and benefits, environmental sustainability, diversity and inclusion practices, social justice and shareholder accountability.

Why is socially responsible investing important? If your values are a defining part of who you are, extending that into your financial investments may feel like a natural fit.

Pro: You’re Putting Your Money Where Your Mouth Is

Consider what matters most to you. Do you spend your free time hiking and supporting environmental causes? Are you an advocate for more diverse workplaces? When you invest ethically, you can choose to support funds or companies with values that most closely match yours.

Con: You May Be Leaving Money on the Table

When it comes to socially responsible investing, performance isn’t the only indicator of success.  If societal impact becomes your measuring stick, you may be excluding some of the biggest money-makers out there. In some cases, that’s because a company’s way of operating conflicts with what you believe.

Sometimes, though, the equation is a little more complicated. Imagine a company that isn’t particularly environmentally friendly but creates products that generate jobs and improve people’s lives. Where does that fall on the moral spectrum for you?

Ultimately, it’s up to you to find the balance between performance and ethics.

Pro: You’re Helping Shape the World Into the Place You Want It to Be

As socially responsible investing becomes more common, it could become a catalyst for change. Businesses understand that public perception plays a huge role in their ability to make money.

Consider this real-world example: Lego ended a partnership with Shell Oil in 2014 after pressure from environmental group Greenpeace. Now Lego has committed to spending hundreds of millions of dollars on sustainability and social-responsibility initiatives, including powering its production facilities with 100% renewable energy by 2030.

Con: Social Good Is Subjective

If performance is how you measure success, investing is relatively simple. But when you bring social impact into the fold, there’s a lot more to consider. After all, what’s important to you might not be important to someone else. In order to invest ethically, you have to determine how you plan to measure “ethical.” For example, the iShares MSCI KLD 400 Social ETF is a popular SRI fund that is heavily skewed toward tech and communications but also includes Coca-Cola, the world’s largest producer of plastic waste. Depending on your beliefs, that could be a deal breaker.

Pro: You’ll Feel Even More Rewarded When Your Assets Succeed

It feels good to see your portfolio flourish. It might feel even better if yours is full of companies you’re proud to stand behind. When you’re focused on socially conscious investing, the benefit becomes two-fold: Your financial assets grow, and you sleep a little better at night knowing you’re doing good in the world.

Need Help?

Whether you’re new to investments or a seasoned investor, talk with a local Farm Bureau financial advisor to learn more about what options are available to help reach your financial goals.

Want to learn more?

Contact a local FBFS agent or advisor for answers personalized to you.