ESG vs SRI vs Impact
Yes, there is a difference between ESG, SRI, and Impact Investing!
Though these terms are often used interchangeably they are indeed different. Understanding the nuances will help advisors better navigate the sustainable investing (another term!) space for the benefit of their clients.
How these terms are being defined broadly in the investment space:
SRI (Social/Sustainably Responsible Investing) came first. SRI is the practice of avoiding companies that don't align with a client's values (like tobacco companies) and investing in those that do (like renewable energy).
ESG (Environmental, Social, Governance) investing is the practice using environmental, social, and governance factors to reduce risk and generate financial outperformance. When done best, ESG investors look at which specific metrics are most financially material to a particular industry or geography. For example, direct energy use from a company's operations might be more relevant to a cement producer than a bank. Environmental criteria investigate a company's contributions to pollution, deforestation, and climate change. Social criteria examine how a company manages relationships with employees, suppliers, customers, and the communities where it operates. Governance deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights.
Impact Investing is characterized by a direct connection between values-based priorities and the use of investors’ capital. These investments try to generate and quantify a positive societal impact. Impact investing commonly refers to private funds, while SRI and ESG investing typically involve publicly traded assets.
When should you focus on ESG and when should you focus on Impact with your clients?
ESG is gradually being baked into all financial analysis. As standards are developing and evolving, and regulators are playing catch up you can make the case for a specific investment approach to your clients. ESG investing is an analysis of risk/return profiles of companies using additional data. Think of it this way, ESG is a type of fundamental analysis and you can approach it the way you would any other conversation with your clients around financial performance.
Impact conversations are not about financial performance. Impact conversations are about the values people hold dearly, and about getting to know your clients as people.
Impact is about how clients feel and where their passions lay. You will not need to convince clients of impact – they will either be very innately interested or completely disinterested. Impact Investing is a way to personalize the positive social impact of your client’s investments.