Social responsibility is a rising phenomenon in the financial planning and investment world. Its roots can be traced to 18th century religious movements, such as the Quakers, who would in no way participate in the slave trade, and the Methodists, whose founder chided followers to avoid doing harm by avoiding industries such as tanning and chemical production. In the 1920s, socially responsible investing (SRI) tended to be more about avoiding “sin” stocks, such as tobacco and alcohol. Today, however, SRI is becoming a common way for people with a wide range of values to express them in the marketplace.
Social responsible investing
Social responsible investing has two goals: to produce a return on investment and to promote some sort of social good. There are a number of ways to engage in socially responsible investing, from large-scale investments in private equities to ETFs and mutual funds. The increasing availability of SRI options allows more and more investors to grow their wealth and feel good about how they are doing it.
In its infancy, SRI was often seen as a poor financial choice made by those whose ideals clouded their financial judgment or those who simply valued doing good above doing well. In recent years, however, SRI has gained increasing acceptance in the investment world. A recent white paper by TIAA-CREF analyzed several of the leading SRI indexes and found no significant difference in their performance compared to the market at large. According to Forbes, approximately $1 of every $9 of professionally managed investments in the U.S. can be classified as socially responsible.
Impact investing is a subset of SRI that goes a step further. While SRI aims to avoid doing harm or supporting companies with undesirable business practices, impact investing has a goal of using investment dollars to actively promote positive change. Common problems addressed by impact investment include green technology, healthcare access, housing, alternative energy, and sustainable agriculture. Forbes describes the trend toward impact investing as a paradigm shift in our approach to philanthropy. Whereas the goal of philanthropy is to do good in the world, impact investing seeks to do the same while generating reasonable returns at the same time.
What constitutes “reasonable” returns is an individual decision. Many investors are unwilling to accept returns below the market rate. These “financial first” investors can find a variety of SRI and impact investments that can reasonably be expected to take care of their need for growth while also achieving environmental or social goals. Some investors, however, are satisfied with varying degrees of below-market performance (ranging from nothing but a return of capital to returns that are slightly below the market rate) because they place a higher value on the broader impact of their investments than the returns they bring.
If you choose to incorporate SRI into your portfolio, you will have to determine your personal need for return on investment. As when making any investment choice, you also must consider your time horizon, financial goals, and risk tolerance. This analysis is best done in consultation with a professional financial advisor, who can look closely at your individual needs and goals and suggest investments that are a good fit.
Boelman Shaw Capital Partners is a financial consulting firm providing a full range of financial planning, tax, and business services. We help our clients plan to retire in comfort, fund their children’s educations, or reach other financial goals with an eye toward minimizing their tax obligation. Contact our office in West Des Moines for a free consultation.
Material discussed herein is meant for general illustration and/or informational purposes only. Because individual situations will vary, the information shared here should be used in conjunction with individual professional advice.