The Difference Between SRI and ESG Investing

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Last week, Advisor Perspectives published A Survey of the Academic Literature on ESG/SRI Performance. The piece compiled many of the best studies on performance, and the author, Marianne Brunet did an admirable job of trying to provide readers with a conclusion on performance. Ultimately, the conclusion was given that some studies determined ESG/SRI strategies helped performance, and others determined it hurt performance.

You can come to more meaningful conclusions on performance with ESG and SRI, but you have to make distinctions between the two to do so. Many practitioners lump ESG and SRI together but they are in fact quite different.

Defining sustainable investing

Investors are often confused over what “sustainable” investing actually is because there is no consensus on the definition. This is especially the case with socially responsible investing (SRI). SRI was originally developed to allow investors to avoid companies they disliked for ethical or values-based reasons. This original form of SRI is now called “exclusions” or “negative-screen” investing. Other SRI strategies have been developed, including positive screen or thematic investing, where only companies aligned to the investors’ values are bought. More recently, impact investing has become popular; here investors provide capital to innovative companies working to solve social problems like endemic unemployment or recidivism. SRI has expanded so much that some have relabeled it from socially responsible investing to sustainable, responsible and impact' investing. Many use these terms interchangeably.

The proliferation of investment alternatives for the concerned investor is certainly welcome, but the confusion that results is an unfortunate side effect. Below is an infographic that attempts to make meaningful distinctions between ESG, SRI and impact strategies.

The value-driven categories on the left include the investment approaches that are designed to not compromise on risk and return. Both conventional and ESG strategies aim to maximize financial return for the risk taken. They put financial return first, before any other issues are addressed. The values-driven' categories on the right include strategies that consider financial return after the investors' values have been satisfied.