Values-Based Investing: Advantages and Pitfalls
April 4, 2025- Values-based investing, which encompasses faith-based investing, impact investing, and socially responsible investing (SRI), has seemed to attract more interest in recent years. Investors may be seeking to align their portfolios with their beliefs. While investing with purpose may offer many benefits, there may be potential pitfalls to consider. In this article, I’ll explore both the advantages and potential pitfalls of values-based investing.
Advantages of Values-Based Investing
Aligning Investments with Personal or Faith-Based Values
A primary benefit of values-based investing is the ability to align your investments with personal, ethical, or faith-based values. For instance, faith-based investing can involve excluding companies linked to industries like tobacco, gambling, or weapons manufacturing. This allows investors to invest in a way that is consistent with deeply held beliefs.
Creating Positive Social and Environmental Impact
Another advantage is the potential to make a tangible impact. Impact investing directs capital to companies or projects specifically designed to address critical social or environmental issues. By investing in these companies, investors may make a difference, knowing that their capital is contributing to positive change.
Impact investors aim not only for financial returns but also for measurable non-financial outcomes. For example, investing in renewable energy companies or businesses focused on affordable housing not only supports these causes but also may help solve some of the world's problems.
In the Christian community, the “Business as Mission” concept combines faith-based ambitions with social and environmental ones to create a “quadruple bottom line” – doing spiritual, social, environmental and financial good at the same time. In my hometown of Birmingham, this cause is championed by the annual Lions’ Den event which seeks to promote growing businesses with a quadruple bottom line.
It Feels Good
In my opinion, the greatest advantage to values-based investing is that it feels good. There may be personal satisfaction in knowing that wealth is being turned toward a purpose greater than just maximizing return. Knowing your investments support businesses that prioritize what you prioritize can lead to peace of mind and a sense of purpose. This alignment may enhance investor confidence and reinforce long-term commitment, making it easier to stay the course during economic volatility.
Potential Pitfalls of Values-Based Investing
While values based investing is a noble cause, it may be helpful to know what could prevent an investor from getting the desired outcome. Is it possible for an investor with the good intent of investing based on values to get the wrong result? Let’s explore potential pitfalls to avoid.
Lack of Standardization and Inconsistent Definitions
A challenge in values-based investing is the lack of what constitutes an ethical or responsible investment. Definitions of can vary significantly among providers, investment funds, and investors.
This lack of standardization can create confusion and inconsistency. It also can serve as a smokescreen for diluted impact efforts and lack of transparency. We have seen funds named to appear one way, but the underlying holdings don’t match the impression given in the name. Inconsistencies in this area can result in portfolios that do not align as closely with the investor’s specific values as expected.
Higher Investment Costs?
Because the average investor may not understand fund expenses, management fees, and how advisors or sponsors are paid, values-based investing is an area where investment costs can be higher than in “plain vanilla” investments, creating a drag on returns. In the public markets, expense ratios are easy to find. Some value-based investment funds tend to be higher than low cost investment options that are available. In addition, firms that sponsor impact related funds, and charge their clients an investment management fee, may have a conflict of interest.
In private markets, understanding what sponsors get paid may be fully disclosed, but the investor may not understand the fee structure, and fees may be higher than other investment options, or more than the investor would want to pay if there was a complete understanding of fees.
Difficulty in Measuring Impact
Another challenge is the difficulty in quantifying the actual impact of investments. While impact investing aims to create measurable outcomes, the criteria for assessing impact can vary widely. How can investors measure the effectiveness of a company's environmental initiatives or its impact on community development?
Even when impact is measured, the metrics and reporting standards are not always consistent or transparent, making it difficult to evaluate whether an investment is truly making the difference it claims. This makes it essential for investors to scrutinize impact metrics and reports, but even then, determining the real-world effects can be complex.
An example of this difficulty is discussed in the podcast 2023 Freakonomics Podcast: Are E.S.G. Investors Actually Helping the Environment?
Difficulty in Measuring Returns
The process of measuring returns on an individual portfolio can be difficult to do. Returns data on public investments is readily available. Illiquid and private investment valuation data is often not and sometimes reported in ways that do not reflect true market value at a given point in time. It can be difficult to get an apples-to-apples comparison from one investment to another. Even more important than the return on an individual investment is measuring total portfolio return. It is difficult for some investors who have money managed separately to know their total portfolio return using standard measurements. This dynamic makes judging the success of values-based investing challenging.
Does this investment fit into my overall financial plan?
A well-constructed financial plan is built with intention. Sometimes, portfolios end up cluttered with investments that don’t fit the bigger picture. The result? Assets that introduce unnecessary risk, reduce liquidity, or create tax inefficiencies—none of which align with the family's long-term goals. While values-based investing is a noble cause, it may be worth starting with a long-term plan, and then seeking out strategies and products that fit, rather than reacting to opportunities as they come along. Judging a values-based investment opportunity first is getting the cart before the horse. It may be prudent to start with the overall plan first, then use values-based investment strategies as building blocks. Before committing to any new opportunity, it’s essential to step back and ask: Does this truly fit our overall plan?
Letting your guard down
Investing within a personal network can feel reassuring, but familiarity isn’t a substitute for due diligence. Sometimes, people trust an opportunity simply because it comes from someone they like or respect—whether a fellow church member, a center of influence, or a longtime acquaintance. This can lead to decisions driven by social proof rather than sound financial planning. Just because someone you know is offering an investment opportunity, or has invested in one, doesn’t mean it’s right for you. Every investment should be evaluated on its own merits, ensuring it aligns with your overall strategy, risk tolerance, and long-term goals—not just the confidence of those around you
Conclusion
Values-based investing offers a unique opportunity to align personal or faith-based values with investment choices, and it holds the potential for positive social and environmental impact. By supporting these practices, investors can feel confident that their portfolios are driving positive change in the world. However, challenges such as a lack of standardization, the risk of higher investment fees, difficulty measuring the outcome, inconsistency with the overall plan, and the possibility of being blinded by social influences need to be carefully considered.
For those willing to navigate these challenges, values-based investing can be a powerful way to build a portfolio that reflects not only financial goals but also a commitment to deeply held beliefs.
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Information presented is for educational purposes only and is not personalized investment, financial, legal, tax, or accounting advice. Nothing on this website should be interpreted to state or imply that past performance is an indication of future performance. All investments involve risk and unless otherwise stated are not guaranteed. Be sure to consult with tax, legal, accounting, and financial professionals about your specific situation before implementing any planning strategies. Investment Advisory Services offered through Timberchase Financial, LLC, a Registered Investment Adviser with the U.S. Securities & Exchange Commission. Registration does not imply a certain level of skill or training.