How can we differentiate ESG, SRI and Impact Investing?
Impact investing seeks to help a company or organization complete a project or develop a program or do something positive for the benefit of society. But sometimes people talk about ESG, or SRI or impact investing, in this article we want to explain these three investment styles.
ESG, which stands for Environmental, Social and Corporate Governance, refers to three main factors to evaluate the sustainability of an investment. While there is a social conscience overlap, the primary focus of ESG assessment is always financial performance.
Environmental criteria analyze the contribution and performance of a business in terms of environmental challenges (eg, climate change, waste, pollution, among others). Social criteria evaluate how the company treats people (eg, decent work, diversity and equality, health and well-being, among others), while corporate governance criteria examine how a company is managed (eg, justice and peace , corruption, corporate management, among others).
These ESG factors improve returns by reducing investment risk and generating investment value. A well-managed and responsible company that cares about its employees, its customers, and the environment is more likely to be successful than companies that don’t.
One step beyond ESG are SRIs or what are known as Socially Responsible Investments, they choose investments according to specific ethical guidelines. Religion, personal values, or political beliefs may be the root cause. For example, an investor may want to avoid any fund that invests in companies that produce firearms because they have anti-conflict beliefs, or issues related to pornography, environmental damage, among others. Alternatively, an investor may choose to allocate a fixed portion of his portfolio to companies that contribute to charitable causes.
For socially responsible investors, making a profit is still important, but it must always be balanced with principles. The goal is to generate results without violating social conscience.
For impact or thematic investing, investments must have a positive impact in some way. Therefore, the purpose of impact investing is to help a business or organization achieve specific impact goals that benefit society or the environment. An example is investing in a non-profit organization dedicated to clean energy research and development, regardless of whether success is guaranteed.