As a topic up for public discussion, socially conscious investing comes with some political touchiness, mostly thanks to its inherent interconnection with the broader climate science debate. Just as our overall political climate has pulled us further apart and closer to the poles of our partisan spectrum, the divisiveness surrounding socially conscious investing has created the appearance of two camps in total opposition. And just as in our political discourse, fundamentally important nuance falls to the wayside.
In turn, much of the financial industry continues to discount any socially conscious approach as misguided philosophy, therefore dismissing consistent demand from investors. And as some socially conscious investors may themselves misunderstand or overlook meaningful details, advisors remain unwilling to engage. In fact, only 18% of financial advisors in 2017 reported ever having a conversation with clients about responsible investing options, according to Nuveen. Yet about three quarters of investors seek that kind of investment solution, according to Morgan Stanley.
Something so innately complex as socially responsible investing deserves a far deeper look from all sides than politicization allows, which means reasonable proponents must work even more intently on communicating its important distinctions that matter most to every investor. Until then, the financial industry will continue to conflate socially conscious investing approaches, to assume all approaches undercut returns and to misunderstand the ways in which different approaches can make a more meaningful impact.
Conflating The Approaches
Many socially conscious investment critics often unknowingly conflate various socially conscious investing approaches into one, formulaic methodology. Often, these critics erroneously narrow the definition down to what’s known as socially responsible investing (SRI), whereby an asset manager prioritizes specific values ahead of performance by excluding certain sectors, companies or products from a portfolio. This often manifests in the removal of climate-unfriendly companies, thus connecting what’s otherwise a straightforward investment methodology to a particular political leaning.
Since blindly screening out entire industries could in fact create unintended risks and performance downside, critics more partial to fossil fuel protectionism tend to argue that socially conscious investing as a whole fundamentally goes against the fiduciary role of an investment manager. While that may arguably hold true for a hardline SRI methodology, many other socially conscious investment approaches can create a much more meaningful balance between personal values, risk and performance. A top-down ESG strategy, for example, prioritizes returns as well as risk aversion by investing in companies that rate highly in environmental, social and governance (ESG) factors.