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Sustainable investing: What is Impact Investing, ESG and SRI?

  • September 09, 2021
  • Front

Sustainable investing is on the rise, with over one-third of global investments today being classed as sustainable. Blackrock estimates that nearly $2tn of mutual funds and ETFs will be sustainable by 2028, up from $1tn today. With this in mind, terms like ESG and impact investing have many retail and amateur investors a little confused. 

Sustainable investing is an umbrella term for investing strategies which are more environmentally friendly, or have a better societal impact. Terms that  can come underneath sustainable investing include ESG, SRI (Socially Responsible Investing) and Impact Investing. ESG or “Environmental, Social and Corporate Governance” looks at various facets of a business to determine if they have a positive impact, such as community engagement or use of child labour (the Social part of ESG). Alternatively, ESG investors may look more at the environmental impact of a business. 

In this article you will find:
  1. What is ESG?

      – Environmental

      – Social

      – Governance 

2. What is SRI?

3. What is Impact Investing?

What is ESG?

Environmental, Social and (Corporate) Governance investing is a set of criteria to help investors look for stocks which are considered better for everyone in either an environmental way, social way or in a way a business is run. Investors can look to use all of the facets or just one or two of them to be considered an ESG investor.

1.1 Putting the E in ESG

Environmental factors can vary from how much energy consumption a business uses either in its operations, manufacturing or how energy efficient their products are. It can also include natural resource preservation, views and policies on climate change through to animal welfare. Just like the wider acronym of ESG, investors do not necessarily need to engage with all sorts of sustainable investing, they may just focus on animal welfare, but it would still be counted as an ESG investment. As the name suggests, these factors look at the impact on the broader environment as part of sustainability.

1.2 S in ESG

Social factors look more at employee welfare, human rights, use of child labour, slavery and even employee relations, as a way to see how well companies treat their staff and even how well their suppliers treat their employees. For example, if a trainer factory uses child labour,  this could impact the sports brand selling those trainers. As a result, this can be harder to explore in more depth as the supply chains make oversight trickier. Despite this, it’s still worth looking at this as part of a wider ESG strategy. 

1.3 G in ESG

Governance (technical corporate governance) focuses on how a business is run. Whilst it may not be considered as important for  sustainability, governance can be very useful in seeing how long a company may stay profitable Governance focuses on things like shareholder rights, transparency, executive compensation and conflicts of interest. All of these can be great in seeing how a company is run and if it is likely to be a viable, sustainable business. Even if investors aren’t interested in the other facets of ESG, this one is a must for all investors when looking into stocks, funds, ETFs and so forth.

SRI

Social responsible investing (SRI) differs slightly from ESG as it takes a more holistic approach. SRI looks at things like how ethical a business is or how green the companies in an ETF are, making  it a little more subjective compared to ESG. With this in mind though, there are a number of similarities between ESG and SRI and can be used interchangeably, it’s still worth it noticing the nuances between the two. 

Finally, SRI is based upon the political and social mood of the time it’s in, so if the mood changes and values and views change (which historically have always done so), investments may also lose value as these wider values shift and people focus on other investments. 

What is Impact Investing?

Unlike  ESG and SRI, impact investing looks more at investments that will generate both a “measurable, beneficial social or environmental return alongside financial gains”. As a result, Impact investing can be seen to differ from both ESG and SRI when it comes to sustainable investing. A good example of impact investing in the real world is Tesla. Tesla focuses on building high-quality cars which are also environmentally friendly. This investment provides shareholders returns and has a real-world impact on the environment- every Tesla sold means one less petrol/diesel engine is being used.

Other examples of sustainable impact investing include renewable energy, Microfinance and sustainable agriculture. This investing strategy tends to support sustainable investments that are likely to provide shareholders with a higher return on investment than other sustainable stocks might do, limiting the number of options for impact investing compared to ESG or SRI.

To Summarize…

When looking to make a sustainable investing , there are many strategies to look at, ESG, SRI or impact investing, just to name a few. SG tends to be the broadest category, allowing investors to look at one or all of the facets to help make sustainable investments. SRI can be a little more holistic than ESG, but it depends on the political and social mood, which is open to change, bringing in more risk. Finally, Impact Investing allows investors to focus on both high returns as well as sustainability, still  the pool of options available is going to be smaller than other strategies such as ESG or SRI.

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