Is there a trade-off between impact investing and earning significant gains?
I am a very socially conscious individual and would like to invest in a manner that will benefit society. However, I am concerned that impact investing would exclude me from some prime investments that would grow my portfolio. Is this a trade-off I have to come to terms with? Can I still earn significant gains through impact investing?
Good question. There will always be a trade off when you have restrictions on what you can and cannot invest in. But it is not like it used to be. There are many good options out there now. Here is a good website to start looking at:
I have put together portfolios for those with socially conscious restrictions and I hate to say it, but the historical risk/return profile is never as attractive. That being said, you can still do a very good job building and preserving wealth and still sticking to your values.
One option is to define what you are opposed to and then looks at funds that are not labeled as SRI or ESG funds and drill down into the holdings and philosophy. If you are working with an advisor, they can do the legwork.
I created my own firm because of the values of the traditional finance world, so I applaud you.
Mark Struthers CFA, CFP®
No, you do not necessarily have to expect lower returns because you choose to avoid certain companies or industries when you invest. This is because stock returns are largely determined by their non-diversifiable risk — e.g., their sensitivity to a major economic recession. A company's values may play into the institutional demand for a company, but this is usually overwhelmed by economic considerations.
The most challenging aspect of socially responsible investing is determining if your investments line up with your values. This is a harder task than it seems. A company may have demonstrated a commitment to cleaner energy sources on the one hand, but may also be strongly opposed to unionized labor. Is the company socially responsible? Another company may sell consumer goods at very low prices, which helps the working-class stretch their incomes, but may also sell food products that contribute to obesity. Is the company socially responsible? The answer is necessarily subjective, and makes socially responsible investing a highly individual endeavor. If you are serious about aligning your investments with your values, you likely will need to create your own portfolio of investments rather than relying upon a third-party fund trying to appeal to some ambigous definition of "social responsiblity."
There is no trade-off between investing with your values and traditional investing. Over the past several years, we've seen the quality and quantity of responsible investment opportunites increase. In virtually every investment category, you will be able to find a fund that performs competitively with it's traditional benchmark.
You still need to conduct your due diligence to make sure that the underlying holdings match your values (not all responsible investment managers have the same standards.)
It's also important to note that you can exclude an entire sector and not hurt performance. At this year's Morningstar Investment Conference, Jeremy Grantham produced a chart showing that by excluding any sector, over the long-term, performance is not impacted. This is important to responsible investors, as we typically want to exclude fossil fuels or other offensive companies.