Explaining the Differences Between ESG, SRI & Impact Investing (2024)

ESG, SRI, and Impact Investing: What's the Difference?

Investing is no longer just about the returns. A growing number of investors also want their money to fund companies as committed to a better world as they are to their bottom line.

Socially responsible investing and one of its subsets, impact investing, have attracted more than one-third of the assets under professional management in the U.S., according to a 2020 survey by the U.S. Forum for Sustainable and Responsible Investment. That amounted to more $17 trillion in assets under management based on socially responsible criteria, an increase of 42% from 2018.

The growing demand has fueled a proliferation of funds and strategies that integrate ethical considerations into the investment process. Environmental, social, and governance (ESG), socially responsible investing (SRI), and impact investing are industry terms often used interchangeably by clients and professionals alike, under the assumption that they all describe the same approach. However, these terms have subtle differences of meaning.

Key Takeaways

  • A growing number of investors want to encourage companies to act responsibly in addition to delivering financial returns.
  • The terms environmental, social, and governance (ESG), socially responsible investing (SRI), and impact investing are often used interchangeably, but have important differences.
  • ESG looks at the company's environmental, social, and governance practices alongside more traditional financial measures.
  • Socially responsible investing involves choosing or disqualifying investments based on specific ethical criteria.
  • Impact investing aims to help a business or organization produce a social benefit.

ESG

ESG refers to the environmental, social, and governance criteria for evaluating corporate behavior and screening potential investments. The ESG evaluation supplements traditional financial analysis by identifying a company's ESG risks and opportunities, which is to say the money they stand to lose by not acting on ESG risks and the money they stand to gain from seizing ESG opportunities. Financial returns remain the primary objective of ESG investing.

The table below lists some commonly-considered ESG factors.

Environmental


Social


Governance


Energy consumption


Human rights


Quality of management


Pollution


Child and forced labor


Board independence


Climate change


Community engagement


Conflicts of interest


Waste production


Health and safety


Executive compensation


Natural resource preservation


Stakeholder relations


Transparency & disclosure


Animal welfare


Employee relations


Shareholder rights


SRI

Socially responsible investing goes one step further than ESG by eliminating or adding investments based solely on a specific ethical consideration. For example, an investor might opt to avoid any mutual fund or exchange traded fund (ETF) that owns the stocks of firearms manufacturers. Alternatively, an investor might seek to allocate a fixed proportion of their portfolio to companies that donate a high proportion of their profits to charitable causes.

Socially responsible investors might also avoid companies associated with:

  • Alcohol, tobacco, and other addictive substances
  • Gambling
  • Weapons production
  • Human rights and labor violations
  • Environmental damage

Between 2018and 2020, assets allocated to sustainable, responsible, and impact investing grew more than 42%, rising from $12 trillion in 2018 to $17.1 trillion in 2020, according to the U.S. Forum for Sustainable and Responsible Investment.

Impact Investing

In impact or thematic investing, positive outcomes are of the utmost importance—meaning the investments need to produce a tangible social good. The objective of impact investing is to help a business or organization achieve specific goals beneficial to society or the environment. For example, an impact investment might fund nonprofit research in clean energy.

The Bottom Line

Approximately 38% of investors in a recent survey reported allocating assets to a responsible investing strategy, while 66% said recent climate disasters have made them more interested in responsible investing. The desire to invest ethically is especially pronounced among millennials, the study showed.

Accommodating that desire to do good remains no easy task given the growing complexity of ESG analysis and the proliferation of financial products marketed as socially responsible. Luckily, investors don't need to go it alone. Several rating agencies score publically traded companies on their sustainability goals. The agencies include Morningstar, Bloomberg, MSCI, and others.

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Explaining the Differences Between ESG, SRI & Impact Investing (2024)

FAQs

What is the difference between ESG and SRI vs impact investing? ›

It's important to note that impact investing refers to private funds, while SRI and ESG investing involve publicly traded assets. For investors who seek transparency about the specific ways their capital is being applied to a particular cause, impact investing might be a more attractive vehicle than ESG or SRI.

What is the difference between ESG integration and impact investing? ›

While ESG investing operates as a framework to assess material risks and opportunities for firms, impact investing is an investment strategy that seeks to first and foremost create a specific, measurable social or environmental benefit.

What is the difference between ESG and impact fund? ›

Impact investing is more focused and deliberate in seeking investments with a specific social or environmental outcome. In contrast, ESG investing considers a company's ESG factors and traditional financial metrics. This is one of the main differences between ESG and Impact investing.

What is the difference between ESG investing and ethical investing? ›

Often, it means filtering out certain types of companies and sectors – usually 'sin stocks' like tobacco products and companies involved in animal testing. The significant difference between ESG and ethical investment is that the latter focuses more on subjective, moral judgements than performance considerations.

What is the difference between ESG and impact report? ›

Impact investing requires investors to measure and report the social or environmental impact of their investments. ESG investing, on the other hand, focuses on evaluating a company's ESG performance and practices through data analysis and reporting.

How is impact investing different? ›

Impact investing is an investment strategy that seeks to generate financial returns while also creating a positive social or environmental impact. Investors who follow impact investing consider a company's commitment to corporate social responsibility or the duty to positively serve society as a whole.

What is the explanation of ESG investing? ›

ESG Investing (also known as “socially responsible investing,” “impact investing,” and “sustainable investing”) refers to investing which prioritizes optimal environmental, social, and governance (ESG) factors or outcomes.

Does ESG investing actually make a difference? ›

“ESG characteristics are important, but so are more traditional metrics like cost,” he says. “Expense ratios for ESG funds have decreased over the years, but they are still higher than other funds on average.” That means you may be paying a slight premium to invest in funds that are targeting ESG criteria.

What are the pros and cons of ESG investment? ›

Pros and cons of ESG investing
ProsCons
Can help investors diversify their portfolioESG funds may carry higher than average expense ratios
May reduce portfolio riskESG investing is still a fairly new concept and there isn't a ton of reporting on performance
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Oct 20, 2022

How do I know if a fund is ESG? ›

While it's true that there's no universally used system for rating ESG companies, there are still many tools that rate and score companies based on their adherence to ESG criteria. Companies that offer these services include S&P Global, Sustainalytics, MSCI and Refinitiv.

Why do investors prefer ESG? ›

Investors increasingly believe companies that perform well on ESG are less risky, better positioned for the long term and better prepared for uncertainty. Companies that realign to the stakeholder capitalism agenda may have a competitive advantage over those that try to return to business as usual.

What is the new term for ESG? ›

The ESG moniker has become so politicized that it now prevents clear-headed thinking, said Alex Edmans, who teaches at London Business School. He's instead proposing the term “rational sustainability.” It may be bland, he said, but sustainability is about producing long-term value—and that's hard to politicize.

What is the difference between traditional investing and ESG? ›

Traditional investing delivers value by translating investor capital into investment opportunities that carry risks commensurate with expected returns. Sustainable investing balances traditional investing with environmental, social, and governance-related (ESG) insights to improve long-term outcomes.

What is the difference between sustainable finance and impact investing? ›

Sustainable finance is focused on integrating ESG factors into financial decision-making processes, while impact investing is focused on making investments specifically aimed at generating positive social and environmental impact.

What is the difference between ESG and responsible investing? ›

ESG looks at the company's environmental, social, and governance practices alongside more traditional financial measures. Socially responsible investing involves choosing or disqualifying investments based on specific ethical criteria.

Is ESG the same as SRI? ›

SRI is a type of investing that keeps in mind the environmental and social effects of investments, while ESG focuses on how environmental, social and corporate governance factors impact an investment's market performance.

What does SRI stand for in impact investing? ›

Socially responsible investing, or SRI, definition

Socially responsible investing (SRI) is an investing strategy that aims to generate both social change and financial returns for an investor.

Is sustainable investing and impact investing the same? ›

Sustainable investing, sometimes known as socially responsible investing (SRI) or impact investing, puts a premium on positive social change by considering both financial returns and moral values in investments decisions.

Do SRI funds outperform the market? ›

In this article, we use a meta-analysis to examine the performance of socially responsible investing (SRI). We find that, on average, SRI neither outperforms nor underperforms the market portfolio. However, in line with modern portfolio theory, we find that global SRI portfolios outperform regional subportfolios.

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