Socially responsible investing (SRI) has become increasingly popular in recent years. The same can be said for equity, social, and governance scores being applied to various companies and investments.
Both of these strategies look to give investors clues into the possible ethical or ideological implications that may come with certain investments.
However, basing investments on these criteria that are outside of normal financial metrics has both pros and cons. It’s important to be aware of these pros and cons so your investments perform as you want them to.
Below, we’ll look at the advantages and disadvantages of SRI and how you can decide if it’s right for your portfolio.
What Is Socially Responsible Investing
Some investors hold strong social, religious, or other ideological beliefs that they don’t want to compromise through their investing. SRI investments allow them to more easily weed out any investments they feel conflict with their beliefs.
This may be due to the nature of the product or service the company or industry produces. But it can also be based on things the company or management does in other areas.
What Are The Pros Of Sri
The main pro is that investors can feel more comfortable making decisions and investments that align with their personal beliefs.
If one feels guilty or uneasy about investing in certain areas, focusing on SRI can help to alleviate those feelings.
As SRI has become more popular, there are many investment funds that cater to almost every area of concern investors may have.
So choosing an SRI approach has far fewer limits than it did in the past. However, it is still limiting.
The Cons Of Choosing An SRI Strategy
While you may feel less conflicted by choosing an SRI strategy, there are cons that may affect your returns.
Choosing an SRI strategy limits your options when it comes to investing. By limiting your options, you reduce opportunities to hedge or explore new markets.
Generally, being socially responsible is not a metric that is used to predict a return on investment. So you will be using metrics as a key deciding factor that are not related to market performance.
Another aspect is that determining how socially responsible a company is and what impact that has on an issue can be very hard to quantify.
So there is always the question of whether or not this makes a difference when it comes to the desired goals and global impact of SRI. If your goal is just for your own piece of mind, this is not a concern. But if you want your SRI strategy to have a real impact, that’s much harder to decipher. However, this doesn’t mean that SRI is not right for you, instead, it means you have to be more careful when choosing investments so your actions have the largest impact.
Finally, fees are generally higher with SRI-focused funds. This may not be an issue for some as they see it as a good tradeoff. But others may see the fees as too high in contrast with what is being offered. ICCNV is an innovative advisory firm full of experienced financial experts who can help you decide if SRI is a good fit for your portfolio and your overall goals.