Traditional investing vs. Socially Responsible Investing

May 04, 2015

David M. Smith, CFP®

May 15, 2015


The primary difference between traditional investing and socially responsible investing (SRI) is that your goals will be different for each strategy. Traditional investing uses profitability as the primary factor in selecting the investments you will own. When someone wants to implement the strategy of socially responsible investing (SRI), he or she will apply their beliefs and values in the selection process and avoid companies and industries they disapprove of and select companies and industries they think match their values. For example, if you think climate change is a significant threat to world health, you might want to avoid companies that distribute fossil fuels and seek companies that provide solar energy solutions, just as you might buy a Prius rather than a Hummer.

I can think of two reasons someone might want to use the SRI lens. First, they may not want to use their personal capital to support oil companies that are warming up the planet and dirtying the air. This seems destructive to them and they do not want to be destructive. Second, one might think that supporting clean energy companies and avoiding fossil fuel companies will help clean energy companies succeed and hurt the oil companies’ profits. Although this may seem to make sense, it is unlikely that one’s investment biases would have any significant effect on the profitability and success of major companies and industries. Next, let’s take a look at how much money is now being invested with SRI as the guiding strategy for investment selection.

According to the “Report on U.S. Sustainable, Responsible and Impact Investing Trends, 20014” from US(SIF, “The total US-domiciled assets under management using SRI strategies expanded from $3.74 trillion at the start of 2012 to $6.57 trillion at the start of 2014, an increase of 76%. These assets now account for more than one out of every six dollars under professional management in the United States.”  These figures suggest that applying SRI strategies to one’s investments is a trend that is rapidly growing and that a significant number of investors wish to select their investments after considering the nature of what services and products are involved and the societal implications of what they produce and how they treat their employees and their shareholders.