Investing for Sustainability and Impact, Explained

You want to invest responsibly —

Here are key terms you need to know like ESG, SRI, and Impact Investing.

Investing can be a means to do well and do good. As you get started on a responsible investing path, you’re likely to encounter a lot of acronyms and key terms such ESG, SRI, values-aligned investing, and impact investing. Here are the similarities and differences, according to Kiplinger, and what you need to know; plus, some resources to help you figure out what’s in your portfolio.

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What's the Difference between SRI, ESG and Impact Investing?

Whether you’re doing your own research on values-aligned investments or talking with a financial advisor, it’s helpful to know these terms:

SRI - Socially Responsible Investing, or Sustainable and Responsible Investing

This is one of the earliest approaches to responsible investing. It often involves “negative screens,” whereby investors avoid (or divest from) morally-questionable industries, such as tobacco, gambling, alcohol, armaments, and fossil fuels. Another approach within SRI that investors may choose, instead of divestment, is to engage with the Board of Directors or company leadership—for example with fossil fuel companies—and push them towards more sustainable and responsible practices, such more climate-friendly forms of energy.

A SRI portfolio may also take the approach of “positive screens” and choose to only invest in companies that line up with the investors’ values, such as companies with a strong diversity, equity, and inclusion policy, or in the clean energy space, or that pay a living wage and take care of the communities where they operate.

ESG - Environmental, Social, Governance

To differentiate the ‘good’ from the ‘bad’ and suss out all the companies that neither fall under “negative screens” nor merit automatic inclusion in “positive screens,” the ESG risk framework was developed.

This approach considers ESG risk in addition to financial risk when evaluating investment opportunities. Some of the issues evaluated are:

• how much of a negative impact is the company having on planetary health? (Environmental)

• how does the company treat its employees and stakeholders? (Social)

• what is the level of executive compensation? (Governance)

This is still a very murky area because the criteria are not well-defined, the reports and ratings aren’t very transparent or uniform, and there is a lot of “greenwashing,” whereby companies claim they’re doing good things but the statements are overblown.

Impact Investing

Impact investors are looking for a direct correlation between their investment and the societal or environmental impact the business will have with those funds. There needs to be a connection between the funds and the impact, and it needs to be measurable and tracked. Because of this, impact investing in the public markets is very limited and difficult, usually only in the form of bonds. Therefore, most impact investments happen in the private markets, such as in projects related to education, poverty alleviation, or clean energy.

What all this means for you an individual investor

Certainly there is some overlap between these terms; for example, you can use the ESG framework to help you consider various factors to mitigate risk when investing responsibly, or according to your values, or when considering an impact investment.

As an investor, you have a voice in the companies in which you hold stock. That means you can vote in Annual General Meetings, write shareholder proposals, and have your voice heard. You can push companies to act as good corporate citizens, and care about the same issues as you do, such human rights, environmental protection, gender and racial equality, etc. If shareholders don’t push companies to be more conscious of their impact on people and planet and provide more transparency (and honesty) in their ESG data, we may have a longtime to wait for regulatory bodies to do the work for us.

It’s up to us to make a difference with our votes and our voices!

Even if you don’t hold stock directly, but rather through mutual funds or ETFs, you can contact the fund manager and tell them your preferences, and what you expect of them and the companies in which they invest. If enough shareholders speak up, the fund manager may be more likely to engage with Boards of Directors to influence company direction.

Learn more about your investments

To learn more about what you’re invested in and how they rate on ESG metrics or align with your values, check out these resources:

• For Stocks: Sustainalytics by Morningstar; or MSCI ESG ratings.

• For ETFs and Mutual Funds: As You Sow.

When you’re thinking about investing according to your values, you may find that it’s difficult to support environmental stewardship and societal goals, therefore it helps to be clear on what your top values are. (The UN Sustainable Development Goals can be a good framework for this. Or you can try a value-writing exercise).

Whatever your values are, you’re sure to find an investment opportunity that aligns with your values.