February 13, 2025

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ESG, SRI, and Impact Investing: What’s the Difference?

ESG, SRI, and Impact Investing: What’s the Difference?

ESG, SRI, and Impact Investing: An Overview

Investing is no longer just about the returns. A growing number of investors also want their money to fund companies as committed to a better world as they are to their bottom line.

Socially responsible investing makes up 12% of the $52.5 trillion investment assets under management in the U.S., according to a 2024 survey by the U.S. Forum for Sustainable and Responsible Investment. That amounted to $6.5 trillion in assets under management that were marked as sustainable or ESG.

The growing demand has fueled a proliferation of funds and strategies that integrate ethical considerations into the investment process.

Environmental, social, and governance (ESG), socially responsible investing (SRI), and impact investing are industry terms often used interchangeably by clients and professionals alike, under the assumption that they all describe the same approach. However, these terms have subtle differences in meaning.

Key Takeaways

  • A growing number of investors want to encourage companies to act responsibly in addition to delivering financial returns.
  • The terms environmental, social, and governance (ESG), socially responsible investing (SRI), and impact investing are often used interchangeably but have important differences.
  • ESG looks at the company’s environmental, social, and governance practices alongside more traditional financial measures.
  • Socially responsible investing involves choosing or disqualifying investments based on specific ethical criteria.
  • Impact investing aims to help a business or organization produce a social benefit.

ESG

ESG refers to the environmental, social, and governance criteria for evaluating corporate behavior and screening potential investments.

The ESG evaluation supplements traditional financial analysis by identifying a company’s ESG risks and opportunities, which is to say the money they stand to lose by not acting on ESG risks and the money they stand to gain from seizing ESG opportunities. Financial returns remain the primary objective of ESG investing.

The table below lists some commonly considered ESG factors.

Environmental

Social

Governance

Energy consumption

Human rights

Quality of management

Pollution

Child and forced labor

Board independence

Climate change

Community engagement

Conflicts of interest

Waste production

Health and safety

Executive compensation

Natural resource preservation

Stakeholder relations

Transparency & disclosure

Animal welfare

Employee relations

Shareholder rights

SRI

Socially responsible investing goes one step further than ESG by eliminating or adding investments based solely on a specific ethical consideration.

For example, an investor might opt to avoid any mutual fund or exchange-traded fund (ETF) that owns the stocks of firearms manufacturers. Alternatively, an investor might seek to allocate a fixed proportion of their portfolio to companies that donate a high proportion of their profits to charitable causes.

Socially responsible investors might also avoid companies associated with:

  • Alcohol, tobacco, and other addictive substances
  • Gambling
  • Weapons production
  • Human rights and labor violations
  • Environmental damage

According to the U.S. Forum for Sustainable and Responsible Investment, 73% of respondents believe the sustainable investment market will grow over the next one to two years from 2024.

Impact Investing

In impact or thematic investing, positive outcomes are of the utmost importance—meaning the investments need to produce a tangible social good.

The objective of impact investing is to help a business or organization achieve specific goals beneficial to society or the environment. For example, an impact investment might fund nonprofit research in clean energy.

Greenwashing

Though sustainable investing is an attractive option to align your investment goals with your beliefs, it should be approached with caution. Investors should be aware of “greenwashing,” where companies or funds exaggerate or obfuscate their sustainability records in order to attract investors.

When looking for sustainable investment options, investors should consult with third-party reviews from agencies such as MSCI, Bloomberg, and Morningstar, rather than just the investment fund’s marketing material.

What Is an Example of a Sustainable Investment?

A common example of a sustainable investment is renewable energy, like solar and wind companies. Investing in these types of companies which focus on renewable energy and seek to minimize harm to the earth’s climate, aligns with sustainable investment principles. Additionally, investing in funds that only allocate capital towards such sustainable companies would be another option for sustainable investing.

Is ESG Investing the Same As Sustainable Investing?

Environmental, social, and governance (ESG) investing and sustainable investing are related but are not the same. ESG investing evaluates companies based on their performance and practices in managing environmental, social, and governance issues to assess risk and opportunities. Sustainable investing is a much broader approach that aims to make investments that contribute positively to society, such as fighting climate change or supporting social causes.

How Do I Start Sustainable Investing?

To start sustainable investing, first, identify the causes and issues that are important to you. For example, if environmental, social, and governance (ESG) are important to you, research sustainable investment options, such as ESG-focused ETFs, mutual funds, or green bonds. You can also search the many platforms or advisors that focus on sustainable investing to learn about additional investment options that align with your principles.

The Bottom Line

Accommodating the desire to do good remains no easy task given the growing complexity of ESG analysis and the proliferation of financial products marketed as socially responsible.

Luckily, investors don’t need to go it alone. Several rating agencies score publicly traded companies on their sustainability goals. The agencies include Morningstar, Bloomberg, MSCI, and others.

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