What are the Pros and Cons of Socially Responsible Investing?

Osmand Vitez
Osmand Vitez
Businesswoman talking on a mobile phone
Businesswoman talking on a mobile phone

Socially responsible investing allows individuals to investment in companies that adhere to their personal beliefs. This ensures that companies that engage in behaviors contrary to social fairness will not profit as much as other companies. Pros to socially responsible investing include voting for businesses with investment dollars, promoting proper business behavior and attempting to establish a sense of ethics for companies. Cons can include losing investment returns and reducing the overall risk mitigation from a potentially smaller investment portfolio.

Individual investors often engage in socially responsible investing so they can promote companies in which they believe. For example, a company that helps promote the livelihood of foreign workers in other countries may be more desirable than other investment opportunities. Individual investors who believe in social fairness will often make investment decisions based on these types of policies or activities of a company. Investors will receive the intrinsic benefits of working with companies to improve the global economy and foreign countries. This is also known as voting with dollars. As investors place their investments into companies they believe are socially active, these companies will receive more benefits from this outside investment.

Helping create an environment of proper business behavior and business ethics is another way investors vote with their dollars in socially responsible investing. Companies that engage in proper behavior and focus on more activities than profit generation will receive more opportunities to improve their business operations. Other businesses may see the benefits gained by a competitor and shift their focus onto socially responsible business practices. Investors will then have a hand in creating a better business environment and establishing more wealth for all individuals who gain non-monetary benefits from socially active companies.

One con to socially responsible investing is the potential for lower investment returns. Companies engaged in socially responsible activities may be unable to maximize investment returns, as all capital in the company is not primarily used to increase profits. Investors will then lose money on capital spent to improve the livelihood of workers or other stakeholders involved with the business. Lower annual returns will mean that investors must keep their investment in the company for more years to earn the regular returns associated with another firm.

Another con to this investment strategy is the inability to mitigate risk. Fewer companies may engage in socially responsible activities. Because of this smaller group of potential investment opportunities, investors may experience higher investment risk. Companies engaged in socially responsible activities may also have higher risk due to lower gross profit margins. This will often make individual investments riskier; investors may be unable to mitigate these risks from individual companies.

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      Businesswoman talking on a mobile phone