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:

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.

Article Sources

Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in oureditorial policy.

U.S. Forum for Sustainable and Responsible Investment. "The US SIF Foundation’s Biennial 'Trends Report' Finds That Sustainable Investing Assets Reach $17.1 Trillion."
Nuveen. "Sixth Annual Responsible Investing Survey,." Page 1-3.

ESG (Environmental, Social, and Governance)

ESG criteria evaluate corporate behavior beyond traditional financial measures. Investors incorporating ESG factors consider a company's environmental impact, social responsibility, and governance practices. This comprehensive assessment supplements financial analysis by identifying risks and opportunities related to ESG. The primary goal of ESG investing is still financial returns, but with a heightened awareness of a company's broader impact.

Commonly-considered ESG factors:

Environmental:
- Energy consumption
- Pollution
- Waste production
- Climate change
- Natural resource preservation
Social:
- Human rights
- Child and forced labor
- Health and safety
- Community engagement
- Stakeholder relations
- Animal welfare
- Employee relations
Governance:
- Quality of management
- Board independence
- Executive compensation
- Transparency & disclosure
- Conflicts of interest
- Shareholder rights

SRI (Socially Responsible Investing)

SRI takes a step further by eliminating or adding investments based solely on specific ethical considerations. Investors may avoid certain industries or actively seek out companies aligned with their values. This approach goes beyond financial considerations to support causes that investors find ethically important, such as avoiding investments in firearms manufacturers or supporting companies with strong charitable contributions.

Impact Investing

Impact investing focuses on achieving tangible social or environmental benefits. Unlike ESG and SRI, where ethical considerations are integrated into investment decisions, impact investing emphasizes positive outcomes. Investors in impact funds aim to fund projects or businesses that actively contribute to societal or environmental goals. An example is investing in nonprofit research for clean energy.

In conclusion, the landscape of responsible investing is evolving rapidly, driven by a growing desire among investors to align their financial activities with ethical and sustainable practices. Understanding the distinctions between ESG, SRI, and impact investing is crucial for making informed investment decisions in this dynamic and socially conscious market.