Will being a socially responsible investor cost you money?

The short answer is ‘probably not’.

If you’re new to SRI, you should check out this page on what SRI is. I know, that doesn’t sound nearly as interesting as whether SRI will make you money, but the answer isn’t straightforward and you do need a way to assess this information for yourself. If you’re looking for a TL:DR version of this, you should probably head straight to talking to an SRI financial advisor.

One thing to keep in mind is the debate tends to be ideological. Traditional fund managers dismiss SRI as a millennial or hippy preoccupation. On the other end of the spectrum, there are those who insist of course, SRI makes both your heart and wallet swell. On this blog, we stick to the facts.

Now, on to the meaty bits.

Why the ‘logical’ argument against SRI doesn’t always hold

Here’s the traditional argument in a nutshell. A portfolio with as many options as possible allows you to put your eggs in a multitude of different baskets, lowering your expected volatility and increasing your returns. SRI is all about excluding options, not investing in companies that don’t share your ESG values. If you put your eggs in ten baskets instead of fifteen, say, what will you do if a careless rooster comes along and upsets five of them? SRI decreases your portfolio efficiency (and your retirement income), say traditionalists.

But what if the options you remove are the less-attractive options? The financial argument for SRI comes from the theory that socially responsible companies are better investment options because of the ESG values they operate by. Ensuring your supply chain is sustainable, for example, means a lower risk of unexpected supply limits or government regulations. Similarly, companies with better corporate governance have more fulfilled and productive employees. Yes, SRI means taking away options, but they were the options you didn’t want in the first place. It’s not merely a pleasant theory; studies show no significant differences in the performance of SRI and conventional indices.

But here’s the rub: there are instances in which this argument holds. Yes, there are studies which show SRI indices outperforming conventional indices. However, indices are populated with companies considered socially responsible, but certification for social responsibility is like the Wild West. If you invest in companies that are poor investments, period, a ‘socially responsible’ label doesn’t add a magic touch to their ability to earn you money.

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