ESG, SRI, and impact investing all exist in the same sphere, but they’re all uniquely different from one another.
Read on as this blog explores those differences and examines the nature of each type of investing:
Socially Responsible Investing (SRI)
A socially responsible investor weighs potential investments against their own value systems.
SRI will prevent you – for instance – from investing in “sin stocks” such as sex-related industries, tobacco, alcohol, or gambling.
However, SRI varies person-to-person since it’s about your own value system.
For instance, Canopy Growth Corp. (cannabis industry) might jive with your principles while Smith & Wesson Brands (weapons industry) doesn’t. It could also be vice versa. Either way, you’re being driven by your own sense of social responsibility, even if both could be potentially classified as “sin stocks.”
Making Money Through SRI
According to Arabesque Partners, provided you deem sustainability practices as part of your value code when investing, SRI can work for you.
Specifically, 80% of reviewed studies showed sustainability positively driving investment performance.
With mutual funds, SRI-based investments tend to perform better than traditional options. Additionally, SRI funds aren’t as volatile as traditional ones.
The only pitfall you need to avoid is only investing based on your social principles. They must be part of your approach–not your entire philosophy.
Environmental, Social and Corporate Governance Investing (ESG)
The ESG tag is placed upon companies focused on limiting their negative impact on society.
Giving guidelines for ESG is the SASB Standards, which sheds light on environmental, social, and governance issues linked to financial performance across 77 different industries.
By familiarizing themselves with these standards, companies can effectively tell investors about their sustainability efforts.
Here are the factors to examine in companies as an ESG-focused investor:
- Water usage, renewable energy usage, green products, greenhouse gas emissions
- Diversity and inclusion initiatives, ethical sourcing from supply chains, safety practices, a priority on social justice, responsive customer service.
- Diverse boards of directors, transparent shareholder communications, ethical business practices, executive compensation
Making Money Through ESG
Industry research shows that good ESG initiatives improve financial performance. Also, companies with favorable ESG ratings aren’t as volatile.
The studies referenced claim that firms face higher regulatory costs when they run into ESG-related trouble. Furthermore, firms failing with ESG lose out on investors who prioritize such factors. And customers might avoid these companies if their reputation takes enough of a hit.
When investing through an ESG lens, remember to account for environmental, social, and governance factors individually. Look at the whole scope.
For instance, a company with a poor carbon footprint might be responsive to social justice. So, be mindful of grey areas–you don’t want to cost yourself opportunities.
With impact investing, value-based priorities are linked with an investor’s capital.
Companies attracting impact investors show evidence that their actions positively impact society. They’ll do so by using reports showing how many businesses they develop for low-income communities, for example. Or, these businesses might have numbers proving how much they’ve reduced their yearly water usage.
Making Money Through Impact Investing
The impact investing market is currently worth over $715 billion, say recent reports from Global Impact Investing Network (GIIN). Additionally, these results show impact investments reaching or bettering financial expectations, achieving similar returns to the broader market.
Still, there’s a feeling amongst experts that social impacts are under-researched. So, investors must learn the differences between impact investing returns and general index fund returns.
Are you seeking out top financial services professionals who have their finger on the pulse of these types of investments? Then contact Preston & Company today to work alongside a specialized financial recruiter.