Socially Responsible Investing: Pros and Cons

It’s easier than ever to align your financial portfolio with the causes you care about. For example, you may be passionate about sustainability or the environment, have particular ethical goals or want to avoid investing in industries like tobacco or weapons. This is called socially responsible investing (SRI), and a growing number of investors are exploring socially responsible investment options. 

But it’s also true that in the face of economic uncertainty, data reveals that younger investors — millennials and Gen Z — are thinking about prioritizing returns over economic and social priorities. So, for many investors, a big question remains. Does socially responsible investing make financial sense? As with any type of investment, the answer is a complicated one: it depends.

If you’re thinking about directing your investments toward socially responsible investing, you might be wondering whether it’s the right choice for you. Here are some pros and cons to socially responsible investing that can help you make that decision. And as you make your decisions, reach out to Farm Bureau for help getting the big picture on your finances. 

What Is Socially Responsible Investing?

Socially responsible investing is the practice of investing in companies and funds that have positive social and societal impacts. This might include supporting individual companies as well as socially-conscious exchange-traded funds (ETFs) or mutual funds.

In general, the companies included in SRI funds are selected based on environmental, social and governance factors. This might include worker compensation and benefits, environmental sustainability, diversity and inclusion practices, social justice values and shareholder accountability.

Why might socially responsible investing be important? If you feel that these values are a defining part of who you are, extending them into your financial investments may feel like a natural fit. Furthermore, you may not want your money supporting causes and companies that go against your beliefs.

So, what are the pros and cons of socially responsible investing? Here are some to consider as you’re weighing your options.

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

For many people, this is a primary consideration. What matters most to you? Do you spend your free time hiking, volunteering for environmental organizations and supporting sustainable 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. You’re showing yourself, and perhaps your loved ones, that you really believe what you say you believe.

Con: You May Be Leaving Money on the Table

For those who participate in 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 most lucrative investments that you could be making. In some cases, that may be because a company operates in a way that conflicts with your values. 

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

Socially responsible investing can be a catalyst for change. Businesses understand that public perception can play a significant 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 you judge success by the performance of your portfolio, then it is easy to measure success. But when you bring social impact into the fold, there’s a lot more to consider. What’s important to you might not be important to someone else. To invest ethically, you have to determine how you plan to measure “ethical.”

For example, you may not want to invest in a fund that does business with a particular country’s government, or that participates in the manufacturing of a particular product, due to your beliefs. Other socially responsible investors may have a more significant focus on pollution, so they may be investing in companies that you don’t want to pursue.

Sometimes, though, the situation is even more complicated. For instance, 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? These questions can be tough to navigate, and you’ll have to think about how you prioritize your values and beliefs. 

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 doubles. When your financial assets grow, 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, reach out to Farm Bureau to learn more about what options are available to help reach your financial goals.