‍Key Takeaways

• Socially responsible investing (SRI) describes an approach to investing that incorporates non-financial considerations, such as social and environmental concerns.
• Environmental, social & governance investing (ESG) is oriented toward screening, ranking and evaluating companies based on environmental, social, and governance factors
• Sustainable investing focuses on investments in companies that are making positive improvements to sustaining the environment, natural resources, standards of living and other goals.
• Impact investing generally focuses on specific investments that address socially beneficial projects or goals.

SRI, ESG, sustainable investing and impact investing all share the objective of incorporating ethical consideration, environmental concerns and social impact into investing, as opposed to focusing solely on financial opportunity. 

Many investment managers believe that by integrating financial analysis with these factors, they are also optimising risk-adjusted investment returns for the longer-term. In addition, such considerations often relate to specific global initiatives, for example, reducing greenhouse gases and achieving ‘net zero’ emissions by mid-century, as laid out in the Paris climate accord of 2021.  

The four strategies, however, address the topic from slightly different directions and with their own focus. Let’s delve deeper into each of them. 

What is SRI?

Socially responsible investing (SRI) is an umbrella term that describes an approach to investing that incorporates non-financial objectives such as ethical concerns, social benefits, sustainability, corporate governance and respect for the environment.

The notion of socially responsible investing began in the mid-1900s as an outgrowth of anti-war sentiment, concerns for racial equality, product ethics and other social concerns of the time. 

In its early stage, SRI was largely implemented by identifying companies that investors would remove from investment consideration due to social concerns. An early implementation of SRI was to shun so-called “sin stocks”, such as those that produced tobacco products, distributed alcohol or manufactured bombs and weapons. 

Over the ensuing decades, the idea of social responsibility in investing became widespread, leading to different approaches. In addition, a great deal of information on public companies has been assembled and distributed to aid investors in evaluating the merits of public companies on non-financial parameters. Using such data has become known as Environmental, Social, Governance (ESG) investing.

In a 2022 report from Capital Group, institutional adoption of ESG data into investment strategy may now be as high as 89%. In addition, private equity investors are increasingly embracing ESG integration - more than 70% say these principles play a part in their investment policies, according to a recent Bain survey.

Environmental, social and governance (ESG)

As the investment audience adopted a greater social consciousness over the last several decades, the demand increased for ways to determine how public companies measured up on social and environmental issues so that such information could be incorporated into investment decisions. 

Responding to this need, specialised data providers began collecting data on companies, including company financials, products, management and other fundamental information.

The non-financial data generally fall into three categories: environmental, social and governance, resulting in this information becoming collectively categorised as “ESG” data. Using such criteria to help evaluate potential investments is then referred to as ESG investing.

According to Harvard Business School, the nature of ESG information on which companies are now being evaluated can include the following:

ESG data can be used in different ways to influence investment strategy. Three methods that are employed include screening companies for their measurements on specific criteria, deciding on minimum rankings to make the “accepted” list for potential investment and eliminating companies for consideration below specified levels on selected criteria.

What is ‘sustainable investing’?

Adherents to sustainable investing see it as a natural and necessary inclusion to investment management that raises awareness of important social and environmental issues. It considers the impact on a wider array of stakeholders in the investment spectrum, while also producing improved long-term investment returns.

Sustainable investing is often viewed in the context of three ‘pillars’: economic, social and environmental. Within these sustainability pillars, the concept can take on meaning in the following ways:

Economic sustainability:

• Fostering economic prosperity
• Eliminating poverty
• Maintaining affordable housing, food, medical care, etc.
• Providing jobs

Environmental sustainability:

• Maintaining the ecological integrity of the planet
• Maintaining or renewing natural resources
• Preserving raw materials
• Maintaining or renewing sources of energy
• Maintaining the quality of air, water, and other elements essential to life
• Reducing “environmental footprints” and activities that are harmful to the planet or its inhabitants

Social sustainability:

• Maintaining adequate human living conditions
• Improving the overall health and welfare of living creatures
• The ability to cope with anticipated factors such as population growth, climate change or resource utilisation
• Maintaining effective social and political systems

A 2022 study by Morgan Stanley concluded that “77% of all institutional investors report increased interest in sustainable investing since 2020, and more than 80% already implement sustainable investing strategies in all or part of their portfolios or plan to do so.” 

Such strategies are commonly associated with specific global initiatives and objectives delineated in agreements such as as the Greenhouse Gas Protocol and the Paris Climate Accord.

Impact investing

Impact investing follows the same general direction as sustainable investing or ESG investing, whereby an investment is considered for its social merits as well as its potential returns. 

Impact investing, however, tends to describe more targeted situations where investments are made to specifically address a social need, a community project or an underserved segment of the population.

The Global Impact Investing Network (GIIN) defines impact investing as being “made with the intention to generate positive, measurable social and environmental impact alongside a financial return”.

The growing impact investment market provides capital to address the world’s most pressing challenges in sectors such as sustainable agriculture, renewable energy, conservation, microfinance and affordable and accessible basic services including housing, healthcare and education.

The GIIN estimates that $1.2 trillion in assets under management (AuM) are currently being managed in impact investments worldwide. An example of impact investing by corporations is Patagonia, who set up a dedicated venture fund in 2013 to invest in startups “building renewable energy infrastructure, practising regenerative organic agriculture, conserving water, diverting waste and creating sustainable materials”.

SRI vs ESG vs sustainable investing vs impact investing: Key Differences