What you need to know about social-impact investing

It is an investment strategy known by many names. Some call it a socially responsible investment. Others call it social-impact investing, or simply influence investment. Still others call it ESG (for environmental, social and governance) investment.

But whatever the name, they all have one thing in common: a lot of misunderstanding.

This is because investors feel that they instinctively know what a socially responsible / social-impact / influence / ESG investment is. But many of his assumptions are at best or just plain wrong. Here’s a closer look at some of those assumptions – and why they may not be as accurate as many believe.

• Socially responsible investment is liberal investment.

The notion that social-responsibility norms appeal only to liberals is a myth. Certainly, boycotting companies that harm the environment may appeal well to most liberals, as does boycotting companies that produce or distribute weapons. But other general social-responsibility norms, such as boycotting companies involved in pornography, may appeal to most conservatives. And the involvement of companies in tobacco, alcohol or gambling will certainly have no political connection.

Consider two other examples. First, Avi Maria Mutual Funds reflect orthodox, religion-based values ​​in line with the teachings of the Roman Catholic Church. The company states that “all investments are scrutinized to eliminate any company engaged in abortion, pornography, embryonic stem cell research, or those who make a corporate contribution to planned paternity.”

Then there is Vitium Global Mutual Fund, formerly known as Vice Fund. The fund’s values ​​can be described as pandering to liberals and conservatives. The fund’s prospectus states that the fund will invest “at least 80% of its net assets … in equity securities of companies that derive a significant portion of its revenue from a group of subcontractors including alcoholic beverages, defense / aerospace , Gaming and tobacco industry. ”

• Socially responsible people should not separate their values ​​from their investments.

I hear this a lot: if you are truly true to your values, then your investments have to reflect this. Well, for some people it can happen. But here’s another way to think about it: Investors who hold a different value than investment can maximize their investment returns without regard to their values, and organizations that promote their values ​​can increase their investment returns or voluntary activities. You can live up to your values ​​by contributing to some parts of.

A banker told me exactly when he invests in international mutual funds. “Do I examine companies in those international funds and determine that they are paying their workers fair wages?” He says. “no at all.”

Yet as much as possible, the banker believes, he is able to live up to his values. He and his wife dedicate a lot of time to their church activities, “whether it is helping the community, educating children, helping the church financially, or working in a soup kitchen Ho.”

However, other investors will revisit this. Different prices and investment advice make as much sense to them as supervisors are advised to replace expensive kosher beef with cheaper pork and donate the savings to their synonyms.

• Socially responsible investment yield Higher Returns compared to traditional investments. Socially responsible investment yield Less Returns compared to traditional investments.

I hear both arguments all the time. If you are a fan (or seller) of socially responsible investing, you often argue that the returns are higher than a diversified index fund. If you are not a fan, you say the opposite.

Both sides have plenty of evidence to raise their claims. This is because there are, if not thousands, if not hundreds of studies comparing the returns of socially responsible investments to those of traditional investments. Some found that socially responsible investments yield higher returns than traditional ones, others found the opposite, and most found no statistically significant difference between the two returns.

For example, when I studied four socially responsible indices, I concluded that their returns were somewhat higher than the returns of the traditional S&P 500 index, but the difference between returns was not statistically significant.

It all becomes even easier when you compare the returns. Investors What earn as opposed Investment Earn. Here, proof Does Suggest that when socially responsible index yields are somewhat higher than traditional indices, investors in socially responsible index funds and ETFs earn lower returns than investors in traditional index funds and ETFs. This is because socially responsible index funds and ETFs bear the high cost of obtaining social-responsibility information, and because they bear the high cost of funds with relatively little assets. Higher fees result in lower returns to investors.

• Socially responsible investors are not ready to sacrifice returns for their values.

There is no truth in it. In fact, many investors are embroiled in socially responsible investments by promises of market-beating returns. They are told they can do well And Do well with an emphasis on “values” rather than “values”. In some sense, you can call these pseudo socially responsible investors.

But the evidence also suggests that at least some investors are willing to sacrifice parts of their returns to remain true to their values. These investors expect lower returns on their socially responsible funds than traditional funds and are prepared to pay higher fees.

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Nevertheless, all investors, even the socially responsible one, are constrained in the returns they can afford to sacrifice. As one financial advisor said to me: “Even socially responsible investors want to retire someday.” One woman described switching from a socially responsible mutual fund to a traditional one when the socially responsible fund’s low returns affected her financial security. Years later he received a large settlement as compensation for a serious injury. “I considered it a luxury that I now have the ability to invest more in line with my values,” he told me.

• Socially responsible investors do well for others by dividing shares of companies inconsistent with their values.

There is no question that investors get an emotional advantage by splitting shares of companies inconsistent with their values. But do they do good for others? For example, do investors deprive tobacco companies of funds by divesting their shares, thereby disrupting the production of tobacco products and limiting the losses it causes?


Socially responsible investors who divest shares of tobacco companies do not assign them to these companies for redemption funds, as they do with mutual fund shares. Instead, they sell their shares to traditional investors. Therefore, tobacco companies are not deprived of money directly by splitting the shares.

Nevertheless, socially responsible investors who distribute or avoid buying shares of tobacco companies may indirectly deprive tobacco companies of money by increasing the cost of equity. This return is expected by shareholders if they are enticed to buy or hold shares of companies. The higher cost of equity may reduce the amount that tobacco companies can get from selling additional shares.

That being said, this “punishment” does not, in fact, deprive these companies of money. This is because some of these companies may have so much money in their hands that they do not need to raise money.

In addition, socially responsible investors can do well by actively operating individual stocks of companies inconsistent with their values. For example, socially responsible investors may question a general meeting of shareholders, filing shareholder proposals, and issuing complaints with regulators or statements in the news media.

Dr. Statman is a Glenn Klimack Professor at the Business School at Santa Clara University and author of “Behavioral Finance: The Second Generation” (available free at cfainstitute.org). He can be seen at @@ jj.com.

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