For most people, the primary goals of investing are to grow their wealth and make their future more secure, such as by planning for retirement. Yet, for some, investing has broader implications than wealth management and financial gain. Conscious investing is done with a higher purpose in mind.
What Exactly Is Conscious Investing?
Conscious investing is also referred to as “socially responsible investing” (SRI) or “values-based investing,” and it has been gaining considerable traction in recent years. Conscious investing is the practice of investing one’s money in an ethical and responsible way. The goals are two-fold:
- To make the world a better place by investing in socially responsible, ethical companies and by refusing to invest in companies that engage in questionable practices
- To generate a profit for the investor, the practice of conscious investing recognizes that although individual investors want to turn a profit, they don’t want their dollars being used for unethical practices.
How Is a Conscious Investment Defined?
The definition of conscious investing raises another question: How exactly does one determine which investments are ethical and which are not? There is no set-in-stone formula, and every person might answer this question a little bit differently.
For example, some people are primarily concerned about the environmental impact of the companies they invest in. They wouldn’t invest in a company that contributes to the deforestation of the Amazon rainforest, but they would invest in a company that follows environmentally sustainable practices and has a limited carbon footprint.
Other conscious investors are primarily concerned with social change. They might prefer to invest in companies that have committed to social equality, such as those with equal percentages of minority and non-minority board members. These investors might also consider whether the company’s everyday practices contribute to or detract from social justice.
Of course, some investors might prefer to invest in companies with a commitment to social justice in both practice and governance, as well as a commitment to eco-friendly practices. This is known as “ESG investing,” referring to environmental, social and governance investing.
An investor who abides by ESG criteria will evaluate all three of the following factors before deciding whether to invest in a company.
- Environmental: This considers the entirety of the company’s environmental impact. It may include everything from how the company manages recycling to whether the company creates sustainable products and the volume of greenhouse gases the company’s activities emit. For example, a conscious investor would prefer to invest in a toothpaste company that manufactures completely recyclable toothpaste tubes and plants trees to offset its emissions.
- Social: The social component of ESG investing is quite broad and considers issues both internal and external to the company. For example, does the company engage in equal employment opportunity practices? Does the company contribute to fair housing, fair lending or other community development initiatives?
- Governance: The corporate governance factor of ESG investing pertains to a company’s leadership and board. A conscious investor might consider issues such as whether the executives’ pay is exorbitant when compared to that of the average worker, whether the board is diverse and whether leadership is steering the company toward ethical decisions.
Is Conscious Investing Practical?
In a 2017 survey, the Morgan Stanley Institute for Sustainable Investing determined that 75% of respondents were curious about conscious investing. However, 53% of them believed that investing in this manner would yield a lower financial return. Its researchers explored this question by examining almost 11,000 mutual funds from 2004 to 2018.*
The study revealed that sustainable mutual funds provided a return on investment that was comparable to that of traditional mutual funds (those not designed with conscious investing in mind). There was no statistically significant difference in performance between these two types of funds.*
Furthermore, the researchers discovered that sustainable mutual funds showed 20% less downside deviation compared to traditional funds. This is a statistically significant finding that indicates conscious investing is less risky than traditional investing.*
What Are the Screening Criteria for Conscious Investing?
There are a variety of screening criteria that individuals and their financial advisors can use to screen mutual funds and individual stocks before deciding whether investing in them is ethical. They include the following: • Positive screening: This method involves actively seeking out companies that fall into the ESG investments criteria and have strong financial performance.
- Negative screening: This approach excludes whole sectors and may also exclude certain individual companies. For example, an investor might decide that he or she doesn’t want to invest in companies involved with weapons manufacturing, tobacco or fossil fuels.
- Thematic investing: Many investors have one or two causes that are near and dear to their heart. For example, one investor might be deeply concerned about women’s rights, while another is primarily interested in water conservation or voting rights in minority communities. Thematic investing focuses on particular causes or issues.
- Community investing: Some investors prefer to develop their conscious investing strategies with an eye toward contributing to the positive advancement of underserved communities. For example, they may choose to invest in banking and lending companies that provide assistance to underserved, low-income communities.
Is Socially Responsible Investing a New Trend?
You might think that conscious investing is a relatively recent trend, but it has deep historical roots. In fact, it’s thought that some religious faiths were urging followers to avoid questionable investments hundreds of years ago. For example, in the 18th century, John Wesley (founder of Methodism) urged Christians to avoid “sin stocks,” which were the stocks of any companies that produced alcohol, tobacco or weapons, or that were involved in gambling.**
During the 1960s, students protesting on college campuses urged their administrations to cease using their endowment funds to invest in weapons manufacturers. This movement was part of the larger protest movement against the Vietnam War.**
Conscious investing continued to evolve during the decades that followed. In the 1970s, the focus shifted to put the spotlight on labor management practices at corporations, as well as the environmental impact of various companies. In particular, the nuclear power plant accident at Three Mile Island fueled a growing concern regarding investing in companies that contributed to pollution.**
The focus of socially conscious investors again shifted during the 1980s. This decade saw significant protests in the U.S. and around the world against apartheid in South Africa. As churches, universities, individual investors and other entities voted with their dollars, so to speak, U.S. corporations realized they needed to divest themselves of South African interests in order to strike a blow against systemic racism and human rights violations.**
By the 1990s, socially responsible investing had become so widespread that there were multiple mutual funds established specifically for conscious investors. During this time, the Domini Social Index was launched for the purpose of measuring the performance of ESG investments. It would play a role in proving that socially responsible investing could indeed be profitable.**
Professional ethics are a cornerstone of the curriculum that finance students work through at Grand Canyon University. If you have a passion for wealth management, consider earning your Bachelor of Science in Finance from the well-respected Colangelo College of Business. Those who already hold a bachelor’s degree are invited to apply for the Master of Business Administration with an Emphasis in Finance degree program.
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*Morgan Stanley Institute for Sustainable Investing, Sustainable Reality: Analyzing Risk and Returns of Sustainable Funds, Executive Summary in April 2021
**The Balance, The Origins of Socially Responsible Investing in May 2021
The views and opinions expressed in this article are those of the author’s and do not necessarily reflect the official policy or position of Grand Canyon University. Any sources cited were accurate as of the publish date.