Merits and Drawbacks of Socially Responsible Investing

As you and your family turn your wealth into a legacy, you may choose to invest based not only on returns but also on the behavior of the particular assets and investors you fund.

Socially responsible investing, also termed “impact investing,” is the practice of investing for financial return as well as global betterment.

There’s already an estimated $715 billion placed in socially responsible investments, and this market hasn’t yet fully matured. In a recent Global Impact Investing Network survey, 69% of respondents projected impact investing to continue its steady growth and another 21% said it’s “about to take off,” while only 2% perceived it to reach its cap.

So whether it’s for your own legacy investments or just to understand today’s financial landscape, get familiar with the growing market of socially responsible investing.

Positive and negative value in socially responsible investing

Is socially responsible investing about promoting what you see as good behavior or punishing that which you see as bad? In practice, this varies between investment groups.

Starting positively: If your family is eco-conscious, you might to shape your investment portfolio with green energy sources. Maybe your passion is to see women, minorities, or marginalized populations get fair opportunities professionally, in which case you might support funds investing in companies started by those respective communities or including them heavily within their board of directors.

Socially responsible investors also, in negation, avoid investments where there’s a known practice that contrasts with their core beliefs, like a company that lobbies against your values or accepts major funding from a source you can’t align with. Weapons contracting, tobacco, or gambling are a few popular issues known to draw a red flag in some socially responsible investors.

While some investors will simply take the highest return wherever it can be found and trust they can use their wealth to later advance their values, an impact investor is likely to avoid investments deemed an ethical compromise.

Screening for socially responsible investments

The impact investing category is rather broad, because worldviews and values vary. It’s difficult to create a singular set of guidelines and assign companies a green checkmark of sorts when one family’s friend can be another’s foe.

Whatever your morals, you can inspect companies’ behavior through screening, a set of filters used by an asset manager or owner to include or exclude businesses or sectors from a portfolio.

Screening can be positive or negative, as explained, and if there’s such thing as an attempt to present a uniform moral code—that green checkmark for all—it’s through what’s known as “norms-based screening.”

Norms-based screening identifies companies falling short of standards set by globally recognized bodies, like the International Labour Organization, United Nations, and UNICEF. When a respected group sets a standard regarding environmental degradation or human rights violations, for instance, a business or sector found non-compliant will be flagged in norms-based screening.

Interestingly, investors are most motivated by avoiding behaviors that run counter to their moral code, not by favoring assets that advance their cause. Numbers released a few years ago showed negative screening accounting for $19.8 trillion assets under management globally, compared with $1.8 trillion for positive screening and $4.7 trillion for norms-based.

An evolution for impact investment

Twenty years ago, when socially responsible investment was not as popular, our industry had very makeshift tools for evaluating impact. Asset managers concocted proprietary criteria for measuring social good created or harm spared. These efforts, while well intentioned, ran the risk of being single-issue in their measurement and reductionistic in their criteria.

The rising popularity of impact investing has made evaluation more effective. Tools like the IRIS Catalog of Metrics or the Impact Management Project’s Five Dimensions of Impact provide more industry-wide uniformity to measure social outcomes, even if there’s not uniformity in what values asset managers emphasize.

Is there a downside to socially responsible investing?

As mentioned earlier, impact investing isn’t a method pursued by all investors, regardless of how values-driven they may be. Some investors opt to maximize profits at all costs, relatively speaking, and to later invest their accrued wealth in causes dear to them.

If there is a case against socially responsible investing, it is that you run the risk of entering a purity contest in which perfection becomes the enemy of good, leading you to miss out on great returns from asset collections that are mostly in keeping with your values.

An asset owner looking to exclude fossil fuel producers, for instance, may miss out on periods of strong performance from the energy sector.

Why might a multi-gen family appreciate impact?

If your family wants to involve younger generations in investment as part of their financial education and preparation for family leadership, then impact investing can be a welcoming gateway.

Maybe your children have more passion for social services than for finance and economics. That’s wonderful—use impact investing as a way to bring them into the conversation. Gain their perspective on values to advance, show them the screening your financial team can provide, and welcome them into some the ethical quandaries created by weighing returns versus global outcomes.

If socially responsible investing can help your descendants gain the financial literacy they’ll need to eventually govern your family, then you have an additional beyond-the-returns reason to consider this form of investment.

Bring your values and legacy into your investments with CM Wealth

Customization is at the heart of our identity at CM Wealth. We find our families exclusive investment opportunities in keeping with their interests, risk profiles, and even their values.

While many of our families take the position of maximizing investments financially and achieving their values through philanthropic work, we do get to know their viewpoints and passions and remain mindful of those when we encounter private equity opportunities for them, for instance. We are eager to help our families set their vision and identify what channels—whether investments, trusts, or philanthropic endeavors—best advance their legacy.

Whether you are a current CM Wealth family or simply getting started with us, tell us about the values that matter to you, and we will work with you on both investments and philanthropic endeavors that grow your family’s legacy will adhering to your values.