ESG, SRI and impact – the three cornerstones of ethical investing. But how much do you know about these unique investment models? And what sets them apart from one another?
Here, we’re taking an in-depth look at ethical investment options, defining ESG, SRI and impact in turn. We’ll discuss what makes them different and why investors choose them, as well as the key things you need to consider before parting with your money.
Use the links below to navigate or read on for the full guide.
- What is ESG investing?
- What is SRI investing?
- What is impact investing?
- Which investment type is right for you?
- Key takeaways and points to remember
What is ESG investing?
ESG investing relates to environmental, social and governance planning. It’s when an investor looks beyond financial performance, taking environmental and social issues into account when assessing the suitability of an investment prospect.
Interest in ESG investing has risen steadily over the past few years. That’s largely down to a growing public awareness of environmental and social issues, as well as governmental pressure on businesses to improve sustainability.
Investors understand that conscious, progressive organisations are well-positioned for future growth and prosperity. Therefore, demand for ESG investments is increasing.
It’s worth remembering that businesses in all sectors face mounting pressures from climate change policy, environmental considerations, labour shortages and energy supply issues. That’s why many investors now want to see robust ESG planning as part of a company’s funding pitch, so they have assurances that a business understands the risks it faces.
Companies with a handle on ESG policymaking are viewed more favourably in the eyes of some investors. They’re considered less of a risk and may also make a positive contribution to causes close to the investor’s heart.
It’s important to remember, however, that financial performance and the prospect of good returns remains the priority for ESG investors. While they value the positive commitments of their business assets, financial gain is the primary goal.
What is SRI investing?
SRI, or socially responsible investing, represents the next step above ESG. It’s when an investor sets out to back a company that they believe in, and one that adheres to specific ethics and guiding principles.
While ESG investing is predominantly based on risk mitigation, SRI is more concerned about backing businesses that share similar values and beliefs. Socially responsible investors typically have a set motive that steers their decision-making, and are unlikely to back any organisation that is affiliated with things such as:
- Addictive substances (alcohol, tobacco, etc.)
- Animal testing
- Climate change denial
- Environmental harm
- Health and safety infringement
- Human rights violations
- Inadequate employee welfare
- Poor waste management
- Terrorism, weapons, and defence
Of course, returns are a consideration for SRI investors, but not at the expense of personal principles. Care and due diligence are a prerequisite of anyone looking to invest in socially responsible companies, so that you can be assured of a business’ identity, ethos, and culture.
Given the often low-returns nature of SRI, many shareholders incorporate this type of investment as part of a broader portfolio. It may not be financially viable to subsist on SRIs alone, and many organisations within this bracket are non-profits and charitable causes.
Still, many SRI investments are profitable, or will be in the longer term. SRI doesn’t need to be about positive change to key issues; it’s more about backing ethical brands that you believe in.
What is impact investing?
Impact investing is at the top of the pyramid when it comes to environmental and socially conscious investing. This is when an investor backs a company to directly support positive change, either within a community or for other environmental and social reasons.
The sole purpose of impact investing is to help an organisation achieve a specific goal. This could be working against animal testing, community projects or the development of alternative energy sources – anything where profit isn’t the primary objective.
Irrespective of the initiative, impact investing isn’t concerned about ROI. It’s purely a way for investors to support enterprises they believe in, without any thought for turning a profit for personal gain.
For this reason, impact investing is comparable to charity donations. However, where it differs is that, with time, a project may indeed offer a return to the investor, even if that isn’t the primary objective.
Say, for example, you were to invest in an organisation developing a new sustainable energy source, purely because you believed in the project and realised the positive impact it could have. With time, such an initiative could yield a return, leaving you well placed to invest in other impact-related causes.
Which investment type is right for you?
Investors become involved with ethical investing for lots of different reasons. Some may genuinely care about specific causes and pursue impact investments, while others may be looking to secure their portfolio with future-ready ESG-related assets that promise a good return.
The option you choose depends on your individual ethics and ethos, as well as the capital at your disposal. Remember, SRI and impact investing can often mean little by way of returns, so you need to be clear on the objectives of the project from the outset.
Regardless of the investment option you choose, there’s never been a better time to dip a toe in the world of ethical investing. With a massive and growing interest in environmental and social concerns, savvy investors stand to do considerable good by backing the right organisations at the right times – whatever ‘good’ means to you.
Key takeaways and points to remember
Ethical investment options can be confusing, so here are a few simple takeaways to reaffirm your understanding:
- ESG investments are typically made with profit and ROI in mind, though there does need to be solid evidence that a firm has a handle on ESG planning and strategy.
- SRI is the next step up from ESG. Here, returns are more nominal but still a consideration, and the investor will likely have a genuine passion for the organisation’s work and progress.
- Impact investing has no other agenda than to do good. Here, profit is very much secondary to making a difference, though returns may come in the longer term.
We hope this guide has cleared up any questions you have about ethical investment options. At Perivan, we help businesses communicate with shareholders, offering a range of professional services that can improve investor relations. To learn more about what we can offer, visit the homepage or contact us today.