Over the last decade, the interest in sustainable, responsible, and impact investing has only been increasing. In fact, according to the U.S. Forum of Sustainable & Responsible Investment, such investments have grown by over 38% just between 2016 and 2018, rising from $8.7 trillion to $12 trillion. But what does it all mean in simpler words? For example, fewer investors are willing to contribute to a company that is more profitable because it doesn’t properly dispose of toxic waste. So if you’re interested in investing and take issues like human rights, climate change, and other social-environmental factors seriously, you’ve come to the right page. Let’s discover what ESG, SRI, and Impact Investing mean after all and how the 3 concepts differ from each other.
ESG stands for Environmental, Social, and Governance practices of a particular investment that materially impacts its performance. Identifying potential risks and opportunities, the combination of ESG factors enhances traditional financial analysis while financial performance remains the main objective of ESG valuation. But what factors do the ESG practices include? Take a look at the table below:
|Pollution||Human rights||Quality of management|
|Waste production||Child and forced labor||Transparency and disclosure|
|Climate change||Health and safety||Conflicts of interest|
|Natural resource protection||Employee relations||Board independence|
|Energy consumption||Stakeholder relations||Shareholder rights|
|Animal welfare||Community engagement||Exclusive compensation|
As these ESG factors become more and more important, analysts calculate the ESG score of an investment. The better the ESG score, the more potential it has to drive returns. On the other hand, investments with poor ESG scores may limit returns. Pro tip: Choose the investment with a good ESG score to get the most out of your investment.
SRI stands for Socially Responsible Investing and goes 1 step ahead of ESG by prioritizing specific ethical guidelines and selecting investments accordingly. Underlying motives of SRI are: Personal values Political beliefs Religious beliefs While ESG analysis shapes valuations, SRI specifies what’s negative or positive when it comes to the investment universe. For instance, as an investor, you may wish to avoid any mutual fund or ETF (exchange-traded fund) that invests in companies engaged in the production of weapons. Instead, you could allocate your investments to companies that contribute to charitable causes. The most common negative SRI factors include: Human rights and labor violation Environmental damage Gambling Production of tobacco, alcoholic, and other addictive substances Production of weapons and defense tools Terrorism alliance Basically, the goal of SRI is to generate a positive return on investment (ROI) without violating social morals.
In Impact Investing, you as an investor should focus on investments that would bring positive outcomes. This means your investment must have a positive impact in some way. For example, you could invest in a non-profit that’s dedicated to fighting against domestic violence, regardless of whether success is guaranteed or not. You may also find that some investors refer to Impact Investing as Thematic Investing. So don’t get confused, they both have the same value. The term impact investing was first coined around 2007, even though the practice was developed years earlier. A basic goal of impact investing is to help reduce the negative effects of business activity on the social environment. That's why impact investing may sometimes be considered an extension of philanthropy. The bulk of impact investing is done by institutional investors, including private foundations, hedge funds, pension funds, and other fund managers.
In conclusion there are different options to invest your money where your heart is, if you'd like to discuss your options further, please schedule a free consultation. I'd love to talk with you about this more.