Socially responsible investing considers environmental, social and governance factors when making investment decisions. It appeals to many investors’ conscience but can bring lower returns or higher risks. The pros include building a better society and accessing specialized funds while the cons are ambiguous screening criteria and fewer investment options.
Screens out unethical companies
Socially responsible investing uses ESG screens to avoid investing in companies viewed as unethical, like tobacco, weapons or fossil fuels. This makes some investors feel better but can also lower returns.
Specialized ESG funds
There are specialized mutual funds and ETFs focused on companies with high ESG ratings. These provide exposure to sustainable businesses but often have higher fees.
Fewer investment choices
The screens limit the investment universe, sometimes significantly. This reduces diversification and the ability to track mainstream indexes.
Ambiguous ESG rating criteria
There is debate around ESG ratings and inconsistent measurement. A company can rank highly in one rating system but poorly in another.
In summary, socially responsible investing appeals to an investor’s conscience but can bring more risk. The pros are exposure to ethical companies and specialized funds while the cons are fewer options and ambiguous screens.