Socially Responsible Investing and Environmental, Social and Governance Investing have both risen in popularity among socially conscious investors. Learn the basics of each, how they differ and which option is best for your investment strategy.
Socially Responsible Investing (SRI) is a type of investing that keeps in mind the environmental and social effects of investments and strives to make positive impacts in both areas. SRI investing is also known as green or ethical investing. There’s also a category of SRI investing called impact investing, which focuses on making positive social impacts via investing. SRI investing is a more active method in that investors can opt out of certain investment opportunities based on whether a company meets these standards.
Investors can take part in SRI investing via buying stocks in individual companies with socially or environmentally responsible missions or practices. They can also invest in a wider swath of SRI-friendly companies via an SRI-focused ETF.
Environmental, Social and Governance Investing (ESG) refers to investing in companies that fit within the ESG framework. More specifically, investors in this discipline consider how environmental, social and corporate governance impact how well an investment does in the market. Most specifically, this type of investing considers how these three factors affect the performance of an investment and, therefore, an investor’s returns.
While there are some notable differences between the two types of investing, they are closely related. For example, the Forum for Sustainable and Responsible Investment notes that “[s]ustainable, responsible and impact investing (SRI) is an investment discipline that considers environmental, social and corporate governance (ESG) criteria to generate long-term competitive financial returns and positive societal impact.”
SRI vs. ESG
It’s no surprise that SRI and ESG are often confused. After all, both methods consider the wider social and environmental implications of an investment. But there are some important distinctions between the two.
Sure, ESG investing focuses on many of the same factors as SRI investing, such as the environmental and social impacts of a particular investment. But ESG investing also considers how a company’s adherence – or lack thereof – to these standards might affect its performance on the market.
Alternately, SRI investing, while it considers the environmental and social impacts of investments, also refers to the practice of actively not investing in certain companies, ETFs or mutual funds because they don’t meet one’s standards for socially responsible investing.
For example, if an investor feels strongly about the adverse effects of a specific industry on the environment, they might avoid investing in companies that don’t adhere to environmentally friendly manufacturing processes. This is an example of SRI investing.
As such, the main distinction between the two types of investing is that one focuses on how environmental, social and governance factors affect the performance of a particular investment (ESG investing) while the other refers to not taking advantage of an investment opportunity based on a similar framework (SRI investing).
Choosing the Best Option
Now that you know the difference between the two types of ethically, socially responsible or “green” investing, it’s time to choose the best option for you and your investment portfolio.
Broadly speaking, if you are a supporter of socially and environmentally friendly investment practices but are more concerned with how they affect your bottom line, ESG investing is probably the better choice for you. That’s because this type of investing considers how environmental, social and corporate governance factors affect an investment’s return.
If you’re more of an activist and don’t mind forgoing a specific investment because it doesn’t fit with your beliefs, then SRI might be a better choice for you. Remember, this type of investing means that an investor may not invest in certain companies, ETFs or mutual funds because they don’t line up with one’s beliefs for socially or environmentally friendly investing. This could also result in potentially lower returns.
The Bottom Line
SRI is a type of investing that keeps in mind the environmental and social effects of investments, while ESG focuses on how environmental, social and corporate governance factors impact an investment’s market performance. Though similar, the two have some major differences. ESG investing considers how a company’s adherence – or lack thereof – to certain standards might affect its performance on the market, while SRI investing can include the practice of actively not investing in certain companies or funds because they don’t meet certain standards.
If you’re more concerned with how the environmental and social impacts of an investment will affect returns, then ESG investing might be the best choice. However, if you’re OK with forgoing potential returns if an investment doesn’t meet your standards for a socially or environmentally conscious investment, SRI investing may be a better option.
Consider talking to a financial advisor about both SRI and ESG investing. Finding the right financial advisor who fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors in your area in five minutes. If you’re ready to be matched with local advisors who will help you achieve your financial goals, get started now.
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