What is socially conscious investing? Who invests that way? Is it profitable? Socially conscious investing has been a bit of a buzz phrase in the last few years, and its popularity has grown. Socially conscious investing can be divided into four categories: responsible investing, sustainable investing, triple-bottom line investing, and impact investing.
Responsible investing is a term used for investors when they are looking to clean up their portfolios by weeding out companies deemed to be “harmful to society”.
Sustainable investing often refers to ESG (environmental – stewards of nature; social – how companies manage relationships with people; governance – look at companies’ leadership, internal controls, and shareholders rights). This type of investing now makes up 33% of total U.S. assets under management.
Triple-bottom line investing - also known as integrated bottom line and the three pillars—involves investing in companies that, as part of their mission, want to positively impact people, planet, and profit in some way.
Impact investing targets companies that produce products and services that directly address social and environmental challenges. Impact investing moves beyond the objective of “doing no harm” to investing in companies “doing active good” through investments in companies created specifically to address important social or environmental problems. Impact investing is based on the principle of using the power of capital for the greater good.
Socially conscious investing has grown in popularity. As millennials and Gen Zers transition into prime investing years (and inherit the largest amount of wealth in history from their parents), the demand for socially conscious investment options will undoubtedly increase. While the expectation is for this type of investing to continue, it’s important to address the financial implications. In a study by the Morgan Stanley Institute for Sustainable Investing of ESG-focused mutual funds and ETFs, it found that there is “no financial trade-off in the returns of sustainable funds compared to traditional funds, and they demonstrate lower downside risk.” Moreover, during a period of extreme volatility, the study found “strong statistical evidence that sustainable funds are more stable.”
The beauty of socially conscious investing in general is that you don’t have to sacrifice financial returns to make a positive impact on society.