Is socially responsible investing an effective strategy?

Socially responsible investing, also known as ethical investing, is essentially about making an active choice to invest in options that align with your personal value system. Most of us would agree, in theory, that we wouldn’t support unethical or illegal practices, such as child labour or environmental destruction, but sometimes we inadvertently do – by investing in companies whose actions don’t align with these values. By making it an active decision, you will avoid unintentionally supporting these types of activities, but is it an effective investment strategy?

Choosing socially responsible investments (SRIs) is demonstrating that you truly live your values, and many investors who adopt this strategy do so because of the potential emotional return, as much as the financial one.

In saying that, there is certainly research out there that shows that SRIs can and have performed just as well as standard investments in many markets, so you won’t necessarily be sacrificing performance. More and more consumers are aligning purchasing decisions with their value systems, particularly in the younger generations, so there is potential for growth in the space too. You only need to look at how consumers have influenced the big supermarkets when it comes to paying farmers more for milk to see this in action.

But there are some things to consider before diving head first into a socially responsible investment strategy:

Your investment options will be limited

Thinking about your core reasons for investing in the first place, you’ll need to decide if social responsibility or wealth creation is your key driver when making investment decisions.  It’s not necessarily that you can’t achieve both simultaneously but taking an ethical investment approach will seriously limit your investment choices, and you need to be prepared for that.

A strong focus on values can cloud judgement

Investment decisions should be made with your head not your heart, but when you are investing in things you believe in, it can be easier to make emotional investment decisions. You care about what the company is achieving, and you’re supporting change for good, which is fantastic, but you also need to make sure your decisions are financially sound and align with your financial goals too.

Ethical investment is in the eye of the investor

While mainstream funds often say they make ethical investments, it’s important to remember that ‘ethical’ is subjective, and really depends on your personal value system. For example, we have clients who believe our supermarket giants are unethical as they don’t give our farmers a fair deal, some who view the banks as unethical due to many dubious fees and charges they apply, and others who view pharmaceutical companies as unethical due to the exorbitant prices they charge for many of their drugs. As the saying goes, ‘beauty is in the eye of the beholder’; in this case, ethical investment is in the eye of the investor.

When a fund says they make ethical investment decisions, it is actually very difficult to determine whether their definition aligns with yours. The best way to ensure you are investing in alignment with your personal values is to develop an independent investment strategy and make direct investments.

At the end of the day, there are many reasons to invest and many strategies you can take, and a socially responsible investment strategy is certainly a valid one. Putting your money where your mouth is and showing you care is a great thing, and there is no reason it can’t be a great financial strategy too. But with so many different definitions of ‘ethical’, the only true way to match your investments to your values is to take control of them, with the help of a trusted professional adviser.  A good adviser can partner with you to make investment decisions that not only align with your values but also help you to achieve your financial goals as well.

General Advice warning

The information provided in this blog does not constitute financial product advice. The information is of a general nature only and does not take into account your individual objectives, financial situation or needs. It should not be used, relied upon, or treated as a substitute for specific professional advice. Apt Wealth Partners (AFSL 436121 ABN 49 159 583 847) recommends that you obtain professional advice before making any decision in relation to your particular requirements or circumstances.