‍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 Group¹, 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.²

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 School³, 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.

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