The Supply and Demand for Socially Conscious Investments

Michael Giberson

The Washington Post has a story on “socially responsible investing,” which puzzles over the below average returns that such investment funds seem to offer:

[I]nvestors often pay a price when they add social considerations to the mix. Socially responsible investing funds, including expenses, generally trail traditional competitors, according to Morningstar data. For the 12 months ended April 30, for example, such funds investing in big-company stocks returned 11.63 percent, compared with 12.28 percent for all big-stock funds. For funds investing in mid-size companies, socially minded versions returned 7.65 percent over the period, compared with 10.24 percent for all funds.

The story quotes various opinions on the lower returns from investors and analysts, but I don’t see the problem. Traditional funds compete for dollars almost exclusively by offering the promise of higher returns; the “socially responsible” funds also offer a non-financial return. At the margin, some investors are willing to sacrifice purely financial returns for a sense that the companies they support are not taking actions counter to the investors’ broader interests.

Competition among funds should tend to keep the returns from getting too far from industry standards. But so long as consumers are willing to accept lower returns, the industry will be willing to charge management fees high enough to ensure that result.

Of course, if an investor begins to see the degree of lower returns as a signal of the degree of “social responsibility” of a fund – and therefore as a signal of the virtuousness of the investor – a new dynamic comes into play.


35 thoughts on “The Supply and Demand for Socially Conscious Investments

  1. That’s brilliant!

    If that ever happens, I guarantee a -100% return on their investment, in return for not investing a single cent of it in the stock of any company that might be even the slightest bit inappropriate.

    Sure, it’s not a great investment, but they can think of it as being like a carbon credit – entirely notional purchased virtue.

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