Why Socially Conscious Investing May Be Costing You A Lot Of Money

by Hank Coleman

Oil spill on the beachHave you heard about socially conscious investing? Socially conscious investing basically means that you or the mutual funds that you use will not invest in companies that do not promote the social good. This takes entire industries like alcohol, gambling, gun manufacturers, potential environmental polluters  and the like out of the investing mix of potential companies in the possibilities for your investments.

Several mutual funds have gravitated to this investing style as a way to market and differentiate themselves from the masses of funds that comprise the investing universe. Socially responsible investing (SRI) mutual funds look to limit or restrict their investments in companies that promote what the general public would consider vices.

They shy away from investing in companies that are seen as environmental polluters, makers addictive substances like alcohol or tobacco, and other companies. Many of these mutual funds have also removed themselves from investing in companies that have been seen as having bad corporate governance policies and practices. They have also shunned companies with suspected human rights violations.

Socially Conscious Investing Mutual Funds Have Gained In Popularity

Socially conscious investments and socially conscious investing mutual funds has exploded in popularity in recent years. The number of socially conscious investing mutual funds or socially responsible mutual funds in the United States has grown to over 250 with assets of more than $300billion as of 2010, this is up 30 fold since their inception in 1995. According to InvestmentNews.com and Morningstar.com, socially conscious investing mutual funds have had over $3 billion in net inflows into these types of funds in the past three years ending in 2012.

So, What’s Wrong With Socially Conscious Investing?

Human rights violations, corporate board misbehavior, pollution, you may be asking why this would even need to be discussed. No one wants to actively invest in companies that commit these atrocities  And, you’re right for the most part. But, there is a flaw in this investment strategy though. These mutual funds and their investors often are too restrictive.

When you buy shares in a mutual fund that restricts what the fund manager can invest in and companies he or she can buy shares in, you must to be willing to accept the possibility of lower rates of return for your investment than you would have normally received in the stock market. This is in exchange for investing in causes or things that are important to your own morales and beliefs.

There are so many profitable companies that are left out from investors in these socially conscious investing mutual funds that you would not normally shy away from. Many of the companies that socially conscious investing mutual funds disgard are many that you probably use every day.

It can also be hard to understand which stocks fit a socially conscious investing mutual fund’s purchasing criteria. For example, Apple has notoriously had issues with its labor practices in the factories that it uses overseas. Should that eliminate this stellar company with great stock price returns from consideration for you to invest in?

Many socially conscious investing mutual funds think that it does merit exclusion from their investments. The same can be said for large oil companies that we depend on in America day in and day out because of their often negative environmental impacts. While these may or may not seem like a big deal to many investors, simply excluding these types of companies can quickly get an investor’s portfolio out of sync with the overall stock market’s rate of return if he or she is not careful.

Is Socially Conscious Investing Profitable?

Lets face the facts. We didn’t get involved in investing to sit on the side lines and not earn a profit. The entire mantra of a publicly traded company is to earn a profit for their shareholders. While it is not recommended that companies do so at the expense of society as a whole, it is not a good financial practice for investors to simply write them off completely either.

Socially conscious investing mutual funds have initially lagged the stock market’s indices during their inception, but as more funds have entered the marketplace, they have rallied in recent years to closely keep up with the overall stock market averages.

One area that is of concern though is the fees that socially conscious investing mutual funds charge their customers. SRI funds can often have an annual expense ratio of over 1.20%. This is often on top of a upfront load or sales charge that they charge their investors which can often be as much as 4% or more. The expense ratio of many, but not all, of these socially conscious investing mutual funds can approach 1% annually as well.

So, should you invest in socially conscious investments? While I am not a fan, I can understand their allure to investors. I would just caution you to read the prospectus carefully. Understand the fees and expenses that these funds charge their investors. You should also know exactly what a socially conscious investing mutual fund will and more importantly will NOT invest in. You may be surprised at how strict they are and how they might not mirror your beliefs after all.


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About Hank Coleman

Hank Coleman is the founder of Money Q&A, an Iraq combat veteran, a Dr. Pepper addict, and a self-proclaimed investing junkie. He has written extensively for many nationally known financial websites and publications. Hank holds a Master’s Degree in Finance and is currently pursuing his Certified Financial Planner credentials. Email him directly at Hank[at]MoneyQandA.com.


Hank Coleman has written 525 articles on Money Q&A. Learn more about Money Q&A on Twitter @MoneyQandA and @HankColeman.


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{ 10 comments… read them below or add one }

Jeremy Shapiro

This is a really good column about investment options and decisions. If you are interested in the psychological level of investment decision-making–including the irrational biases that lose us money–check out my column on the psychology of money and happiness at Quizzle

Dr. GoodCents
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Hank Coleman

Thanks, Jeremy! I appreciate the kind words.
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@pfinMario

I’m going to go out on a limb and say that it never will be more profitable than general investing. Why? Because all else equal — that is, when folks expect similar returns — people will always invest in the company that hugs puppies instead of the one that sets fire to trees. But there’s psychic value in it…maybe think of the foregone profit as part of your charitable contributions.
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Hank Coleman

Even if there is a psychological value to conscious investing, I would like to pick my own charitable contributions myself and keep them out of my investing. Plus, you can’t chalk up a loss in an investment as a “charitable contribution”, the money is gone in thin air as an investing loss and not gone to help the actual charity help people.
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Roger @ The Chicago Financial Planner

Good post. Over the years I’ve worked with a couple of foundations and endowments that had certain investing restrictions both faith-based. That’s fine and their performance did suffer a bit vs. clients without those restrictions. At the very least we were unable to use low cost index products until they modified their investment policies years later. My take is certainly folks have to live their convictions. but why not take some of your investing gains and contribute to groups that support your point of view on whatever topic is important to you.
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Hank Coleman

Great points, Roger. I agree. I’d rather separate my investing and giving based on my own profits and ability to give freely based on what I believe in. I would just prefer to separate the two. But, I can understand someone who wanted to invest that way as long as they realize the potential downside too.
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Jenny @ Frugal Guru Guide

I wish we would just opt out of a single company or industry! I’d love to not be profiting from tobacco, for instance. But I don’t choose the mutual funds in our 401k account.
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Edward Antrobus

“For example, Apple has notoriously had issues with its labor practices in the factories that it uses overseas. Should that eliminate this stellar company with great stock price returns from consideration for you to invest in?”

But if more people cared about Apple’s atrocious labor practices, fewer people would buy their products and their stock price would fall. My wife has a used iPod Nano and iTunes on her PC. That is the extent of my relationship with Apple, and frankly I wish I didn’t have that much.

Plus, Steve Jobs built Apple. Then he he left and it faltered. Steve Jobs resurrected Apple from the brink of bankruptcy. But Steve Jobs isn’t going to come back any more. Long term, I don’t see a bright future for the company.
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Shawn James

Great Post! I have found many people’s are invested money in particular company. However, I can’t refuse socially responsible investing because it’s supports small businesses and entrepreneurs around the world with microloans.

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Scott @ Youthfulinvestor

I learned personally that the best socially conscious investment is investing locally. Invest in what you know, what you seek to better and what you can actually see in your daily life.

We can be critical of any given mutual fund or specialty social ETF but, each is going to have some element that angers one of our moral ideas of what is right.

We can also petition and vote as a shareholder but, how far will we go? How far will our word make it, especially when we should be concerned about our profits?

Investing locally enables one to see it working for one and their community. That money will come back. It will be motivating and reciprocal. I think in terms of credit unions, affordable housing, small business loans, co-ops, guilds, etc.
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