Values-Based Investing Advantages and Pitfalls

Advantages of Values-Based Investing

Aligning Investments with 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, or gambling. This allows investors to invest in a way that is consistent with deeply held beliefs.

Creating Positive 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.

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 contribute to 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

Lack of Standardization

A challenge in values-based investing is the lack of what constitutes an ethical or responsible investment. Definitions 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. Funds may be 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 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 is why it is so important to invest in what you know.

The 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?

Don’t Let 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.

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.