Difference Between ESG and SRI Investing
A new class of investors emerging in the 21st century want their money to do more than simply multiply. The younger generation, especially millennials, put their money where their mouth is. Millennials seek out investments that make the world a better place, choosing sustainable and ethical companies over companies that just churn out profit.
According to an Ernst & Young research report, investors aged 20-39 are almost twice likely to invest in companies or funds that have a positive environment or social impact.
This trend has given rise to value investing—if you tend to scrutinise companies and check if their values align with your own personal values, you are a value investor. This could entail investing in companies with a strong environmental impact, good labour practices, LGBTQ inclusion, equal representation on the board, etc.
The two most popular forms of value investing are environment, social, and governance investing (ESG investing) and socially responsible investing (SRI investing).
Often, the two investment strategies tend to be confusing for the investors. While the overarching principle of ESG investing and SRI investing are the same, certain nuances set the two apart.
What is ESG investing?
Environment, social, and governance investing is a strategy to invest in companies that either reduce their negative impact on society, contribute to societal betterment or both. If you invest in a fund that exclusively buys companies with green practices, is socially responsible, and has strong governance principles, you are following ESG investing.
ESG investing is based on understanding the impact a company has on society. It involves asking a broad set of due diligence questions on how environmental, social, and governance factors are threaded into a company’s overall performance and returns. For instance, investing in an oil and gas company that is working to reduce emissions, has robust safety practices, and gives back to the community will be considered ESG investing. However, a green technology company that has poor labour and governance practices may not make the cut for ESG investing.
What is SRI investing?
Socially responsible investing is an investment strategy that considers how your personal values align with a company’s values. It works by exclusion rather than screening companies that have certain practices. For instance, you may refrain from investing in “sin companies” such as those that manufacture alcohol, tobacco, weapons, gambling, etc. You may also choose to not invest in fossil fuel companies altogether. SRI investing is one of the simplest and least expensive forms of value investing.
What’s the difference between the two?
There is no denying that ESG investing and SRI investing are similar. These operate on an underlying framework of investing in companies that benefit society. Both are forms of value investing.
However, ESG investing considers how companies are positively or negatively impacting the society. It does not discount a particular company by industry or sector, instead focusing on the overall impact it has on society.
On the other hand, SRI investing considers only those companies, mutual funds or ETFs that invest in companies aligning with your own moral values. It works by exclusion. The main difference here is that SRI investing emphasises not taking advantage of investments that do not adhere to environmental, social, or governance factors.
Which investment strategy should you choose?
Choosing the right strategy for your investment portfolio comes down to understanding how you want to invest. Do you want to invest in companies that actively give back to society? Or do you have certain moral principles that you would not give up in your financial portfolio?
If you value the environment, social causes, and governance of a company, you should opt for ESG investing. If you have strong moral principles and don’t mind forgoing the returns from particular investments, then SRI investing is the way for you.
Value investing, either through ESG investing or SRI investing, is a noble investment strategy to consider. However, before you invest, be careful to thoroughly analyse the fund or companies you choose to invest in. It might be prudent to get a financial advisor who is well-versed with value investing to help you.
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