Socially responsible investing has become increasingly popular in recent years, as more investors look to align their portfolios with their values. However, like all investment strategies, it has both advantages and disadvantages. In this article, we will take a balanced look at the pros and cons of socially responsible investing.
Pro: Reflects ethical principles and values
One of the biggest appeals of socially responsible investing is that it allows investors to reflect their personal ethics and values in their portfolios. Rather than investing indiscriminately, SRI allows investors to proactively support companies that engage in sustainable, ethical practices. This gives investors a sense of aligning their money with their principles.
Con: Reduced diversification can increase risk
Because socially responsible funds intentionally exclude or underweight certain sectors, they tend to be less diversified than conventional funds. Lack of diversification means risk is concentrated in fewer assets, which exposes investors to greater market volatility. For example, avoiding oil and gas companies may hurt returns when that sector is outperforming.
Pro: Competitive returns compared to conventional funds
While some believe that SRI necessarily means sacrificing returns, research shows that many SRI funds have returns comparable to conventional funds with similar risk profiles. For example, a 2021 Morningstar study found that 71% of sustainable funds ranked in the top halves of their investment categories. This suggests investors may not have to compromise performance.
Con: Requires research and monitoring
Choosing socially responsible investments takes time and effort for investors. It involves researching companies’ ESG practices and controversies, a consideration absent from conventional investing. Ongoing monitoring is also needed to ensure holdings continue to meet responsible standards over time as business practices evolve.
In summary, socially responsible investing lets investors align portfolios with their values, but may require accepting higher volatility. It can deliver competitive returns through thoughtful portfolio construction. Overall, SRI offers a compelling option for those seeking both financial and social returns.