Does this investment make me look good?

Demystifying social impact investing.
Social impact investing is about investing more money into socially beneficial companies and products, and less into socially harmful ones, but some questions remain unanswered, argues the author. Image: Shutterstock

One of the trendiest ideas in finance is something called “social impact investing,” which is the idea that people should put more money into socially beneficial companies and products, and less into socially harmful ones. That hardly sounds objectionable, but I am skeptical about how much good social impact investing can do.

The first risk is that social impact investing will be used to “whitewash” various harmful policies. By divesting from a particular set of companies, an investment fund loses at most a very small benefit from an additional degree of broader market diversification. The fund still is likely to earn the market rate of return on its other investments, and in the meantime it can claim virtuousness. At the same time, the funds can pursue socially harmful policies elsewhere: investing in companies that lobby for tariff protection, say, or emit less visible forms of pollution, or how about refined sugar?

A second risk is that social impact investing simply redistributes wealth from investments — maybe to less socially conscientious individuals. Imagine a socially conscious investment firm that declines to participate in the initial public offering of a company that pollutes the ocean. That might create downward pressure on the price of the IPO. But there is a problem: The value of the actual investment has not declined, so at a potentially lower IPO price other investors will step in to fill the demand. In fact, those investors may have the chance to buy at a discount and earn a higher return than otherwise.

The net result is that conscientious investors have missed out on a profitable opportunity, while less socially aware investors have earned more. Over time, the less socially aware investors will become richer, and their greater wealth may translate into greater political and economic influence.

Maybe this effect isn’t large, but it is negative, and it will become correspondingly larger to the extent social impact investing becomes more popular (in 2018, the money pouring into sustainable investment funds quadrupled, rising to about $21 billion). That doesn’t sound like an appealing trade-off.

But put that worry aside and assume that social impact investing simply makes it easier to get a solar power company off the ground with an IPO or an expansion. It’s still not clear that much has been gained. At that late point in the process, the company will succeed or it won’t, no matter what the socially conscious funds do.

If anything, it would be more useful to have socially conscious research and development at the very early stages of projects. To some extent, there are such investments, and I am more sanguine about being conscientious than when companies already exist and funds are making investment decisions.

It is also difficult to monitor the performance and social efficacy of the funds focused on doing good. In actively managed sustainable equity funds, for example, the most commonly held stocks are estimated to be Microsoft, Alphabet, Visa, Apple and Cisco. I have nothing against those companies, but you have to wonder exactly how much social improvement those investment funds are buying.

Norway’s fossil fuel divestment is well-publicized. Less well known is that it exempted Shell and Exxon. There simply aren’t clear benchmarks for which investments to avoid, and of course some critics will portray technology companies as the embodiment of evil.

Too many of the empirical arguments for social impact investing stem from a single example: South Africa under apartheid. In that case, a coordinated campaign of divestment and international economic and social pressure did hasten the end of apartheid, all for the better. But most sanctions are not very effective at achieving their stated political goals, or their effectiveness may be unclear. South Africa may have been a special case because it was relatively small and isolated, and because so many South Africans had ceased to believe in apartheid.

Investment in socially beneficial activities can be worthwhile. But it ignores the question of who decides what is “beneficial,” and it is yet another example of how politics and media are becomingly increasingly performative. Everything is about looking good instead of substance. It is increasingly difficult for businesses and investment funds to perform their proper work under the glare of perpetual debate and periodic condemnation.

The notion of extending that same glare to economic investments makes is hardly reassuring. I’ve yet to see a conception of social impact investing that I find convincing.

© 2020 Bloomberg L.P.


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Interesting article. I cant really tell whether the author is for or against sustainable investing. I think perhaps against.

I do think that perhaps he misses the point. Capitalism and business are key to a growing and healthy economy. However capitalism without a social conscience/ protecting resources is not.

The point of social impact investment may well be that folk want to start making a point and start putting pressure on unsustainable businesses. The big case being climate change and plastic.

Banning plastic straws may not change much but it creates awareness. Awareness starts to change behaviour and behaviour changes result in company changes.

Norfund made a change. They will go further as more pressure will be placed.

The tiny change in purported returns may be an expense I am willing to incur to place pressure

Who decides what is social conscience and which resources to protect?

Makes sense for Norway not to invest in oil and gas for diversification reasons (they probably call it something else). They are however still investing in their own oil and gas projects.

Tiny change in returns? What is tiny? How do you come to this conclusion.

The beauty of capitalism is that you can choose what to invest in.

I don’t see social investing as a choice, it is a question of price. A business which incurs large environmental damage is clearly not sustainable in the long run and that will be in the price and their cost of capital. If however, they are trading at a discount to what I perceive to be their fundamental value, I would have no problem buying their shares.

Social impact investing.

WHEN an investment approach must be “demystified” in order for it to be understood, it worries me.

(Only overtly complex Ponzi schemes needs proper ‘demystifying’ or religious sects with complex dogma…yes, that I can understand 😉

What the first question a retiree asks his/her fin.advisor when they do annual client reviews on their Living Annuity performance?:

Is it
(i) “what returns did my portfolio achieved the past year?”, or
(ii) “I can’t wait for my advisor to report to me how great impact my social investment did for others”.

Every month most of us do ‘social impact investing”….it’s widely known as Income Tax.

(…we seem to forget about the “invisible hand” economic principle. When an economy boom and thrive, the whole country benefits…socially also.)

Zim’s investment community must try “social impact investing” on their side….that’s probably what was missing during all these years of decline(?)

End of comments.




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