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, and it aligns with the principles of conscious capitalism.
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.
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.
When looking for ethically conscious companies to invest in, an investor might decide to follow a negative screening methodology. In other words, they might decide to avoid investing in any companies that are involved with tobacco, weapons manufacturing or fossil fuels.
Alternatively, they might use a positive screening methodology, such as by actively seeking out companies that embrace ethical capitalism. Some investors prefer thematic investing, which involves investing in causes that are near and dear to them. Examples include women’s rights, healthcare or water conservation.
Community-based investing is another possibility. A socially conscious investor might prefer investing strategies that contribute 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.
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 2018.8
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.8
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.8