SRI vs. ESG vs. Impact Investing

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Insight Summary

  • It’s important that investors understand the differences between SRI, ESG and Impact Investing.
  • Socially responsible investing (SRI) entails screening investments that conflict with an investor’s values.
  • Environmental, social, and governance (ESG) data was introduced as a tool to guide socially responsible investors. While there is an overlay of social consciousness, the main objective of ESG valuation is financial performance.
  • Impact Investing bridges the altruistic principles of philanthropy with traditional investing. The idea is to generate social and/or environmental benefits while delivering a financial return – thereby providing a tool for both investors and philanthropists

SRI vs. ESG vs. Impact Investing

When it comes to choosing values-based investments, it’s important that investors understand the differences between SRI, ESG and Impact Investing.

Impact Investing is among the newest terms, coined by the Rockefeller Foundation in 2007. The term is used to describe investments that generate a measurable, beneficial social or environmental impact alongside a financial return. However, this form of investing is often confused with Socially Responsible Investing (SRI) or ESG. To understand the differences, let’s take a step back and look at the evolution of these concepts.  

Socially Responsible Investing (SRI)

While Impact Investing is a newer concept, socially responsible investments date back to the Pentateuch – the first five books of the Bible, believed to have been written by Moses as early as 1500 BC. The books mention a term called “Tzedek” (meaning justice and equity), and how it should govern all aspects of life. The principle provided historic cultures with a set of criteria on how to generate financial returns ethically and sustainably.

At its core, Socially responsible investing (SRI) entails screening investments that conflict with an investor’s values. In the United States, origins of SRI investing began when 18th century Protestant Christians resisted investments in “sin stocks” (i.e. companies manufacturing liquor or tobacco products or promoting gambling). SRI investing gained strength again in the 1960’s, when protestors of the Vietnam War demanded that University Endowment funds no longer invest in defense contractors. In today’s world, we see common SRI exclusions including fossil fuel producers and firearms manufacturers. 

SRI remains the simplest (and often the least expensive) values-based investing approach. Investors actively eliminate or select investments according to specific ethical guidelines. While this approach is primarily values-driven, research has shown that SRI investing can also accrue added financial benefits to investors. This is where ESG data comes into play. 

Environmental, Social and Governance (ESG) Investing

Environmental, social, and governance (ESG) data was introduced as a tool to guide socially responsible investors. Investors use ESG data to find companies making active efforts to limit their negative societal impact and/or deliver societal benefits. 

Investments with good ESG scores tend to drive stronger financial returns, while those with poor ESG scores may inhibit returns. While there is an overlay of social consciousness, the main objective of ESG valuation is financial performance. An example of an ESG investment might be buying stock in a technology company that converts one of its data centers to use renewable energy, resulting in cost benefits as well as a positive effect on the environment.

It’s important to note that most SRI investing using ESG data is done via publicly traded assets (i.e. mutual funds, index funds or exchange traded funds). For instance, investors might avoid mutual funds or exchange traded funds engaged in firearms production because they hold anti-conflict beliefs. 

Impact Investing

As opposed to SRI and ESG investing, which rely on exclusionary practices to screen out harmful investments, Impact Investing aims to bridge the altruistic principles of philanthropy with traditional investing.  

The idea is to generate social and/or environmental benefits while delivering a financial return – thereby providing a tool for both investors and philanthropists. This investing approach was developed in response to the inability of governments and philanthropists to solve society’s complex issues. This can be represented by the estimated $2.5 trillion annual funding gap needed to achieve the United Nations’ Sustainable Development Goals (SDGs). According to the Rockefeller Foundation, a mere 1% shift in global capital markets towards impact investing–or investments that work toward social good–could cover the gap (source). 

Impact investing appeals to a variety of investors because it balances commerce and compassion. It also offers a broad range of options, as shown in the following diagram. Some strategies emphasize financial return while still seeking to benefit society. Other approaches put social impact first, accepting returns that vary from below-market rate to a simple repayment of principal (source).

Impact Investing Spectrum from the Rockefeller Foundation

Whatever the interest of an investor, finding one’s place along the spectrum is a key consideration. While the approach depends on the investor, there remains two key elements to any impact investment: intentionality and measurement. The investor’s intention needs to include some element of both social impact and financial return. And while there is more standardized metrics for financial returns (i.e. ROI), investors should also aim to measure the social impact. To do this, we recommend you refer to the GIIN’s IRIS+ system. It is the most commonly accepted system for measuring, managing, and optimizing impact. 

About Impact Capital Partners

At Impact Capital Partners, our mission is to connect institutional capital with the growing impact investment market to address the world’s most pressing challenges. By utilizing impact investments, institutional investors are able to generate positive, measurable social and environmental impact alongside a financial return. We are constantly finding new impact investment opportunities in both emerging and developed markets, targeting market-rate returns. Schedule a call with us HERE if you’re interested in learning more about our impact opportunities.