These days, thanks in part to millennials, a lot of investors care about the companies they choose to invest their money with. For a growing number of investors, investing is not only beating projections or having a big growth in sales. Some investors want to invest only in companies that are doing right by the environment or society at large. That means they avoid investing in tobacco stocks, defense companies, oil producers, and gun manufacturers to name a few. Socially conscious investors embrace those companies that believe in the environment, feel it’s important to give back to their community and want to play a role in helping improve society. However, while socially responsible investing will help people sleep well at night, it turns out it may not make a lot of financial sense. (Read more, here: What Is Socially Responsible Investing?)

There Isn’t a One Size Fits All Definition of Socially Responsible Investing

For one thing, critics of socially responsible investing argue there aren’t any clear definitions of what makes a company socially responsible, so crafting a portfolio of socially responsible stocks is more subjective than science. Even the funds that claim to invest only in socially responsible companies have varying definitions of what constitutes a socially responsible company, making it hard to have a cohesive investment strategy in that area.

Proponents of socially responsible investing contend that if companies care about society and/or the environment, then over time the company's efforts will be reflected in an increased share price. But making the leap that a company's efforts to recycle or give back to the community will somehow result in a higher stock price is a flawed argument. Increasing sales and earnings usually help a stock, not the fact that the company is doing right from a social perspective.

Socially Responsible Funds May Not Be Cheaper Than Others

When it comes to investing, fees matter a lot, and that is particularly true of socially responsible funds, otherwise known as SRI funds. Just like with other funds, the fees can vary, which means some of these SRI funds are going to cost you more than they are worth. Sure you may not be exposed to big oil or gun makers but if you are paying too much to avoid those industries than it is going to eat away at your profits. Even with ETFs, which traditionally have lower fees than mutual funds, not all SRI ETFs are charging rock bottom prices – making the investment in socially responsible stocks sometimes costlier than investing in the so-called bad companies.

Investing Socially Could Shut You Out of Market Gains

Feeling strongly about an idea and a belief is great but when it comes to investing people can’t lose sight of the end game: making money. Sometimes investors will get so caught up in making sure they are investing in socially responsible companies that they end up missing out on a run up in other industries. That run up could have made them more money, which they then could have used to donate to their causes.

The Bottom Line

Socially responsible investing has a place in some investor’s portfolios, but if all your choices are being dictated by the social actions and behaviors of corporations, you may end up losing a lot of money in the long run. Gauging just how socially responsible a company is can be tough to do and if you invest in a SRI fund you may be overpaying. Not to mention that having a singular focus on the social behaviors of companies could shut you out of gains from other industries.

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