Impact Investing Could Do the Opposite of Its Intentions

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There is a investment movement which is gaining popularity called Socially Responsible Investing (SRI) or Impact Investing. These movements are founded on the idea that you should strive to bring about positive social change in the world with your investment selections. As I’ve said before, stock ownership is a bad strategy for social change and SRI does not work the way it claims.

I recently read a February 2020 Bloomberg article entitled “Does This Investment Make Me Look Good? ” where Tyler Cowen muses on the real impact of impact investing.

Among his arguments was one that I had not thought of before: that if enough people focus on impact investing, and especially without also using true free market forces to change their spending habits to demonetize the practice they are avoiding, they effectively redistribute wealth from those who invest like them to those who do not care.

Cowen explains it this way:

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.

In other words, if a morally questionable idea is a valuable money maker, then your avoidance of that fund will only give more wealth to those whose conscience is clear investing in it.

In contrast, if you invest in companies because they are good investments, you can redistribute the wealth you receive from them towards their competition and make even more of an impact in the world.

In this way, you should avoid patronizing businesses that you don’t believe in long before you consider changing your investment strategy. In fact, it is only once your consumption habits have started to successfully make a company not a good investment that financial wisdom would recommend removing it from your investment strategy.

Photo by Diogo Nunes on Unsplash

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Megan Russell has worked with Marotta Wealth Management most of her life. She loves to find ways to make the complexities of financial planning accessible to everyone. She is the author of over 800 financial articles and is known for her expertise on tax planning.