Socially responsible investments (SRI) focus not only on the ability of a company to make a profit but
also on the principles held by that company. The manager of a socially responsible mutual fund only
invests in companies that meet certain ethical criteria. In other words, people who invest in SRI funds
don’t have to worry about their money going to companies that provide products or services that
conflict with their values.
What Types of Socially Responsible Investments Are Available?
There are several types of socially responsible investments. Some examples of popular criteria include:
- Environmental responsibility
- Human rights
- Religious views
What Are the Drawbacks of Socially Responsible Investments?
1. Vague Definitions of SRI.
socially conscious if “the fund identifies itself as selectively investing based on certain noneconomic
principles.” This lack of clarity makes it difficult to know if you invested in the right fund for you. The
same investment may be a socially responsible investment under one definition but not another. For
example, a nuclear research company conflicts with a fund that avoids investing in militarized weapons.
However, nuclear research could fall under the criteria of a fund that invests only in green energy.
2. Lack of Diversification.
Although the number of SRI funds has grown rapidly over the past decade, these funds represent a very
small number of the funds available to all investors. Consequently, it becomes a challenge for investment
managers to construct a diversified portfolio out of SRI funds alone. It also doesn’t help that most
companies who have socially responsible investment practices tend to be smaller companies. As a result, most SRI mutual funds are equity funds that can be more volatile than the average fund.
SRI fund managers must go through the extra step of making sure potential investments meet not only
financial criteria but also social criteria. This extra step increases expenditure on research. Socially
responsible funds also tend to be smaller than the average fund, leaving fewer investors to split costs.
Despite the potential drawbacks, FSA believes that socially responsible investments can add value to
your portfolio under the right circumstances. As a result, we developed a socially responsible
right for you.