The terms ESG (Environmental, Social and Governance), SRI (Socially Responsible Investing) and Impact Investing have been used interchangeably over the years to refer to specific investment approaches with a focus on aligning one’s investments with one’s values. While these approaches share a common goal of aligning financial goals with ethical and sustainable considerations, there are distinct differences in how they are implemented and the specific outcomes they aim to achieve. Let’s break it down:
ESG investing primarily focuses on integrating environmental, social, and governance factors into the investment decision-making process to help identify companies that exhibit strong sustainability practices and responsible governance structures. It is most often used in the work of public investments like stocks and bonds. Investors using ESG criteria consider factors like carbon emissions, workplace diversity, executive compensation, and other ESG metrics to evaluate the overall sustainability and ethical performance of companies but generally only if those are deemed to affect the financial returns of those investments. The goal of ESG investing is to generate financial returns while promoting sustainability, so companies are generally only flagged if their ESG failings could affect their financial performance.
Impact investing goes a step further by emphasizing the intention to generate measurable social or environmental impact alongside financial returns. Historically this has meant investing in more “upstream” private investments or younger companies. Impact investors actively seek investment opportunities in companies, organizations, or projects dedicated to creating positive change in specific social or environmental areas. Impact investments may focus on sectors such as clean energy, affordable housing, social entrepreneurship, or community development. Investors focused on impact criteria measure the effect of their investments through metrics such as job creation, carbon reduction, or social development indicators.
SRI, or Socially Responsible Investing is the broadest and oldest label that meant investing with your values. It encompasses both ESG investing and impact investing, but typically focuses on excluding or including specific industries or companies based on ethical criteria depending on the investor’s specific value. For example, SRI investors historically avoided investing in industries such as tobacco, firearms, or gambling, but as the years went on the original focus broadened to support companies that promote diversity, human rights, or sustainable practices. SRI strategies can be implemented through negative screening, positive screening, shareholder advocacy, or community investing to align investments with personal values and societal goals.
In summary, while ESG investing, impact investing, and socially responsible investing all prioritize ethical, social, and environmental considerations in investment decision-making, they differ in their specific objectives and approaches. ESG investing focuses on the effect of ESG factors on financial performance, impact investing seeks to generate positive social or environmental impact alongside financial returns, and socially responsible investing encompasses a range of strategies that align investments with ethical and value-based criteria. At Impact Investors, we use aspects of all these metrics as they each have a useful lens to create a more complete picture of the social and environmental criteria of one’s portfolio.
If these distinctions spark any thoughts or questions, don’t hesitate to reach out to us to discuss and learn more.
