Investors looking into how to make a positive impact with their money cannot get far without encountering the concept of socially responsible investing (SRI). But should the research stop there? While SRI has deep roots, more recent developments like environmental, social, and governance (ESG) investing and impact investing have their own merits. Though the terms may often be used interchangeably, each refers to a specific investment approach.
Read on for a closer look at SRI as well as how it compares with its alternatives.
What Is Socially Responsible Investing?
Proponents of SRI seek a positive impact by avoiding investments that do not align with their values.
Emerging in the late 1960s, the socially responsible investing movement was largely borne out of demand from nonprofit organizations, universities, and religious institutions. Early SRI funds excluded investments in weapons manufacturers, tobacco companies, and businesses with strong links to apartheid South Africa. Over the years, as environmental issues and concerns about climate change have become increasingly urgent, some SRI portfolios have eschewed investments in fossil fuel companies. Avoiding gun stocks has also become relevant in the wake of several mass shootings in recent years. In place of disfavored investments, an SRI fund may have above-average exposure in permissible industry sectors like technology, healthcare, and education.
Some investors may embrace exclusionary SRI strategies from a primarily ethical imperative—they do not want to earn money from investments that conflict with their values. Particularly when divesting from companies or industries, they may also be making a public statement.
SRI in Context: ESG Investing and Impact Investing
Two other sustainable investing strategies stand in relative contrast to socially responsible investing. Impact investing and ESG investing both take a more fundamentally inclusive approach. For example, impact investors actively seek out investment opportunities that effect positive social or environmental outcomes, like educational technology or renewable energy.
With ESG investing, investors use data-driven frameworks to weight their portfolios toward companies that score well on ESG criteria. Of course, ESG investors may choose not to invest in certain opportunities, but that decision will be based less on personal ethical considerations than on ESG scores that could indicate reputational, operational, regulatory, or other risks. This is because, for both ESG and impact investors, financial returns are typically a core consideration, whereas with SRI they may be secondary.
One strategy closely associated with ESG and impact investing is shareholder engagement, either through direct dialogue or the proxy voting process. This method of urging companies toward more sustainable practices requires a financial stake, which socially responsible investors forgo by excluding companies from their portfolios. Some institutional investors have even debated internally over whether divesting or engaging is the most effective approach to driving change.