Socially responsible investing, or SRI, is one of the hottest trends in investing right now. But does it work?

To answer that, it might help to know what SRI actually is. SRI is an investing strategy that often applies screens to exclude companies that don’t align with your environmental, moral, ethical, religious, or social values. It can also apply positive screens to seek out investments in companies that “do good.”

Environmental, social, and governance (ESG) criteria frequently go hand-in-hand with SRI; socially conscious investors look for companies that are respecting the environment, treat their employees well and respect diversity, and are structured in a shareholder-friendly way.

At the end of the day, socially responsible investing is different from traditional techniques because it aims to produce two types of returns: social and financial. But does it actually achieve those goals?
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Excessive screening. Kevin Mahn, chief investment officer of Hennion & Walsh, says that the screening aspect of SRI can also be controversial.

For example, an SRI fund may ban companies that earn a certain percentage of their revenue from tobacco, alcohol, weapons, or gambling. These screens fail to consider that “excluded companies that were perhaps ‘sinful’ in certain areas were providing positive, sustainable characteristics in other areas.”

“Limiting the sectors or industries that are included in a given investment portfolio can also hinder potential diversification and/or growth of capital opportunities,” Mahn says. Socially conscious investors are still investors after all, and if returns are materially limited by investing with a conscience, that’s a problem for the industry.

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