A Look at Socially Conscious Investing
It’s a socially conscious world out there. Buy a coffee, and it’s likely the cup will be made of recycled paper, and the stirrer or straw might even be made of compostable soy. Hybrid and electric cars are becoming more common, and so are clothes that the manufacturer assures have been made in sweatshop-free facilities. But it’s not just cafés, cars, and clothes that have gone socially conscious. The world of investing has, too.
The World of Vice
There is an old saying that no matter how bad the economy gets, people will still smoke, drink, and gamble. Fund managers created funds around these three pillars of vice (and sometimes, a fourth: broadly, the defense industry). As Forbes notes, there isn't “any evidence that investors are buying these ‘vice’ stocks because they’re attracted to the sinful nature of their products. In many cases, the stocks in question offer characteristics that could prove compelling to investors, like growth opportunities or dividend income, which have nothing to do with the perceived moral character of a company or its products.”1
But what happens when investors start thinking about the so-called “perceived moral character” of the stocks they buy?
The Growth of a Movement
Socially conscious investing is, as the International Business Times explains, “an increasingly popular strategy that steers investors’ money toward companies that match their values, and away from businesses that don’t, such as companies involved with pornography, tobacco, labor abuses, or weapons.”2
There are many names for this practice, including “socially responsible investing,” and as Forbes notes: “’sustainable’...’mission,’ ‘green,’ or ‘ethical’ investing.” The publication also details the three ways in which socially conscious investing is accomplished, including buying stocks of companies that an investor feels is doing some good to society or the environment, using shareholder status to advocate for socially conscious policy; or a third way, which is known as “community investing.” This, Forbes explains, is when “investors’ capital is directed to those communities, in the U.S. and abroad, which are underserved by more-traditional financial-lending institutions and gives recipients of low-interest loans access not just to investment capital and income, but also provides valuable community services that include health care, housing, education, and child care.”3
Indeed, socially conscious investing has evolved from its humble beginnings, which, as the Wall Street Journal recounts, was “when it mostly meant not buying the shares of companies in controversial industries such as tobacco, firearms, alcohol, or gambling.” Now, according to the Journal, “investors who favor this approach routinely consider a broad range of corporate behavior under the umbrella of so-called ESG factors—environmental, social and governance, as in corporate governance.”4
And according to the Los Angeles Times, socially conscious investing now “covers more than $6 trillion in invested assets.”5 In other words, socially conscious investing has become big business.
The Impact of Impact Investing
Yet another name for socially conscious investing is “impact investing.” Meaning, investors use the strategy to make an impact. So the question is: does impact investing make an impact? It does. And this is not a recent phenomenon.
Opining on the subject for MarketWatch, Jennifer Openshaw recounts a significant instance of socially conscious investing that took place on a grand scale 30 years ago: “In 1986, pension funds globally moved to oppose apartheid in South Africa by divesting of some $200 billion in companies that supported it.”6
Yet, especially when it comes to investing, it can be easy to get caught up in the dollars and cents. Advocates for socially responsible investing point out that the difference made by investing in a socially responsible manner may not always be measured by sells or buys, or global, newsworthy events. Rather, the fact that so many people are aware of it is an accomplishment in and of itself.
The evidence, advocates argue, is that a staggering amount of companies now issue corporate social responsibility (CSR) reports. In fact, Institutional Investor reported that, “Companies around the world published 7,838 corporate social responsibility, or CSR, reports last year, 30 percent more than in 2010.”
Clearly, companies are increasing efforts to assure investors that they are acting in a responsible way. And while this may seem like it’s for the investors’ benefit, as Institutional Investor reports, it can also be beneficial to the companies themselves: “Researchers have found that firms operating in environmentally and socially sensitive industries such as oil and gas extraction, mining, and weapons production enjoy significantly higher stock-market valuations when they issue comprehensive CSR reports.”7
In the past, socially conscious investing was about avoiding particular stocks for moral or religious reasons. On the other end of the spectrum, there were the “vice” investors, who believed some sectors were far more resistant to recession than others. They were both niche investment strategies. Now, socially conscious investing has shown that it’s not about avoiding the “bad” things, but actively investing in good.
Through shareholder advocacy, demanding accountability, and spreading awareness of what businesses’ practices are, socially responsible investing has taken on many forms, and has even influenced those companies in the vice sectors. As such, you can be just as concerned about society as you are about your portfolio.
This article is not an endorsement of any particular product, service or organization; nor is it intended to provide financial, tax or legal advice. It is intended to promote awareness and is for educational purposes only.
1 Source: Forbes. Investing In The Sin Bin: Are 'Vice' Stocks Like Tobacco, Booze And Casinos Smart Bets? Steve Schaefer. May, 2015.
2 Source: International Business Times. Socially Responsible Investing For Millennials: How To Pick Retirement Funds That Match Your Values. Angelo Young. October, 2015.
3 Source: Forbes. Socially Responsible Investing: What You Need To Know. Michael Chamberlain. April, 2013.
4 Source: Wall Street Journal. Does Socially Responsible Investing Make Financial Sense? February, 2016.
5 Source: Los Angeles Times. Beyond profits: Millennials embrace investing for social good. Tom Petruno. December, 2014.
6 Source: MarketWatch. ‘Socially responsible’ investing has beaten the S&P 500 for decades. Jennifer Openshaw. May, 2015.
7 Source: Institutional Investor. CSR Reporting Is on the Rise, and So Is Its Impact. Katie Gilbert. July, 2015.