Can we think of art investment as socially responsible investment?

When conducting my research on the use of artwork as a financial investment, I came across some interesting justifications for investing in art from some of the finance-side interviewees. In addition to the typical comments about portfolio diversification, some people, along with some of the background readings, suggested that we could envision art as a type of sustainable or socially responsible investment. Below I will consider whether this is the case for investing in art funds.

There are different ways to make a financial investment in artwork, but due to the complicated nature of the art market and the many expectations that differ from traditional financial market exchange, I usually suggest that novices with investment goals start by searching for an art investment fund, rather than buying work outright. Most of gallerists whom I have spoken with recognize that artwork does have investment value, but they tend to prefer someone who will buy works that have an emotional resonance, or aesthetic appreciation value. Given the recent troubles with people who have thought of their houses as too much of an investment, I also share this caution. Furthermore, being able to pick artwork at a low price that will go up in value over time requires some expertise, and a greater return is necessary to compensate for the relatively high transaction costs of buying and selling at auction.

Art funds, however, usually provide this expertise in-house, the same way that a hedge fund manager has expertise in stocks, bonds and other investments. Although this type of securitized art investment is fairly new, there are a number of established and upcoming funds with different goals. The best funds will offer the benefits of a diversified portfolio of artwork, expert advising, financial expertise, and transparency about management costs, goals and other factors. When you put money into one of these funds, which are usually structured as private equity, you are essentially buying a ‘share’ of their portfolio. Many of the funds have the added benefit of annual dividends, which could be preferred to a direct purchase of art, where the investor only sees money at the end of a fairly long holding period.

But is this socially responsible investment (SRI)? Well, if we think about the meanings of sustainable investing, through screens and filters, as well as other types of socially responsible investing, such as faith-based goals, artwork would be considered acceptable for many of these goals. For example, according to one expert in Islamic finance, the fact that the funds are backed by real assets means that they could be a type of Islamic investment. Another consultant that I spoke with laughed at the idea that artwork was socially responsible, but he said they could be seen as a type of passion investment. Artwork is not usually associated with sin products, environmental pollution, or other areas typically associated with negative screens. Credible fund managers  will also carry out due diligence on any work purchased, to make sure that it is not stolen property or under dispute.

While some people oppose the idea of treating artwork as a financial investment, a good number of those involved in the art market welcome new buyers, even if they are investors rather than traditional collectors. Purchasing shares in an art fund is not the same thing as donating to a museum, but it is a way of directing money toward arts and culture.

Potential investors with an SRI agenda should know that this type of (fund-based) investment does not usually benefit the artists directly. This is because living artists are paid for their work when it is sold for the first time through a gallery, but unlike film producers or musicians, they do not typically enjoy profits on future sales of their creations. Intellectual property rights protect them others profiting from the unauthorized use of the images or ideas, but artists are not paid from future sales of the actual piece. The exception is that in the European Union, and a few other places, auction sales are taxed by the droit de suite, or artist’s resale rights, which provide a form of royalty to the artist or their estate. Nonetheless, while the artists may not benefit directly if funds are purchasing work in the secondary market, it is possible to make the argument that for an artist to gain a greater following in the secondary market does improve their career prospects, at least indirectly.  (There are a few funds that have goals of providing income to actual artists, but these typically have a different structure, so I will not discuss these here.)

With these considerations in mind, my personal opinion is that we can think of art funds as socially responsible investing, but you have to think about your goals. This type of (fund-based) investment can provide some benefits to artists and those in the market, but bear in mind that it is not the same thing as directly “investing in the arts” by donating to a museum or other nonprofit engaged in arts and culture.  It might be more accurate to say that you are investing in the art market, as opposed to the arts. However, if you want to invest your money according to your values and interests, this seems to be a reasonable way to go about it.

As with all investment advice, be sure to do your research and due diligence.