SRI and ESG Investing - you've heard the words, but do you know what they mean?
As an investor, you have countless decisions to make about your portfolio. Risk and return are just two factors to consider, but many more variables may impact what investment vehicles you choose.
For example, you can choose what companies you want to invest in based on their values and responsibilities. Two of the most common values-based standards are Socially Responsible Investing (SRI) and Environmental, Social and Governance (ESG) investing.
What is Socially Responsible Investing (SRI)?
Socially responsible investing is an investing strategy in which investors choose their portfolio based on a company’s demonstrated social responsibility. SRI is also known as values-based investing, sustainable investing or ethical investing. As the world continues to change, many investors are seeking to create a more sustainable and ethical portfolio, and SRI is a strategy to do just that.
The exact definition of SRI can vary from individual to individual because everyone has a slightly different definition of values-based investing. For example, one investor might be focused on investing in minority-owned businesses or businesses that are actively working to reduce their carbon footprint, while other investors are focused on investing in companies that value their employees and support human rights and fair labor practices.
Some common SRI screens include:
- Alcohol, tobacco and other addictive substances
- Production of weapons and defense tools
- Conflict/war affiliations
- Human rights and labor violations
- Environmental damage
What is Environmental, Social and Governance (ESG) Investing?
Like SRI, Environmental, Social and Governance (ESG) investing is a strategy that allows investors to build a more ethical portfolio. Unlike SRI, however, ESG is clearly defined in what it includes, and these criteria are directly tied to a company’s performance rather than personal values. Environmental factors refer to how well the company conserves resources, social factors refer to how the company treats individuals both inside and outside the company and governance factors refer to how the company is run.
Here are some factors to consider for each category:
- Carbon emissions
- Air and water pollution
- Water use
- Fossil fuel/green energy use
- Employee diversity
- Customer satisfaction
- Employee protection
- Sexual harassment and protected class policies
- Fair labor practices
- Human rights
- Board member diversity
- Executive salaries
- Conflicts of interest
- Shareholder rights
Some investments have an ESG score, which determines how well they adhere to the above guidelines. While SRI has some flexibility depending on the investor, ESG guidelines are clearly outlined for companies to follow.
What are the Differences between SRI and ESG Investing?
As you can see, ESG criteria are a little more specific than general SRI investing, while SRI investing depends on the individual investor. SRI may use specific ESG guidelines, but it can also go beyond ESG. Additionally, an SRI portfolio can be specifically tailored to your preferences.
One way to highlight the difference between these ideas is by looking at Vanguard’s VFTSX fund. This mutual fund is screened for particular ESG criteria because it excludes the stocks of fossil fuel companies, but the fund also includes companies that some SRI investors may not choose to add to their portfolio. ESG screenings merely focus on the above categories, while SRI investments can be as broad and diverse as the investors supporting them.
In today’s investing world, there’s no reason why you have to sacrifice performance for your social conscience, or vice versa. With ESG and SRI investing, you can choose to invest in companies that align with your personal values, from LGBTQ+-friendly businesses to those that support the advancement of green energy. Your portfolio can be as individual as you are.
Cappuccino Financial is a boutique financial services firm with a focus on helping individuals, families and business owners navigate financial decisions to anticipate their needs and plan for the future.
This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.
Social Responsible Investing (SRI)/Environmental Social Governance Investing (ESG) has certain risks based on the fact that the criteria excludes securities of certain issuers for non-financial reasons and, therefore, investors may forgo some market opportunities and the universe of investments available will be smaller.