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Challenges of Socially Responsible Investing

PlanetEarthBalancing profits, people, and the planet can be tricky. Many investors prefer to put their funds into companies that not only make money, but that also reflect the investors’ values. Some take this concept, often described as “socially conscious” or “socially responsible” investing, very seriously. There are also financial advisors who specialize in this niche.

Yet investing in companies whose values align with your own is not as simple as it may seem.

In my experience with business owners and corporate executives, most of them take an interest in bettering the people who work with them, the planet, and their own lives. They run their companies with integrity. They don’t break the law. They respect their customers and don’t take advantage of them, but give them fair value in exchange for their money. They offer compensation and working conditions that will attract and retain good employees. Ultimately, they understand that ethical business practices are not only the right thing to do, but the best way to run profitable businesses.

But how do you as an investor know whether a company is bettering people and the planet while it is making a profit? One method is to choose companies in which to invest by using some type of socially responsible screening. Such screening looks to exclude companies producing products that harm people or the earth, or companies judged to have poor corporate cultures.

One challenge with using such screens is that we don’t all have the same definitions of what may be socially or morally offensive. Investor A may not want to own stock in oil or mining companies. Investor B may be concerned about goods produced in unsafe working conditions. Investor C may not want to support companies that sell tobacco or alcohol.

A second challenge is that companies change. They may expand, diversify, or merge with other companies until it’s difficult to pinpoint their values, products, and company culture. A company may sell a lot of great products that do a lot of good for people, but have one division that produces a product some investors may find offensive. And it’s even harder to screen for companies that have good cultures—especially since there’s no clear definition of a “good” culture.

Investors can choose mutual funds that include only socially responsible companies, but any such fund is almost guaranteed to include companies that you would otherwise exclude.

If you are serious about investing only in companies that support your values, it’s essential to research them before you invest and monitor them regularly to ensure their practices or products don’t change. You also may find it necessary to give companies or SRI funds a little leeway—settling for perhaps 95% compliance with your values rather than insisting on 100%.

But sadly, even if you could invest your money in the shares of companies that totally support your values, doing so may not have much impact on that company, its people, or the planet. One reason for this is that your investment is likely to be a miniscule fraction of the company’s stock.

In addition, most often when we invest in stocks, we do not buy shares directly from the company. We buy shares, through a stock exchange, that are being sold by other investors. The profits or losses involved in trading those stocks accrue to the third-party buyers and sellers. They don’t directly affect the company’s bottom line.

For most small investors, making a difference through socially responsible investing may be an illusory goal. Its only real impact may be to help us feel better about ourselves.

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