SRI vs. ESG

Nowadays, investors seek value beyond money; they also prioritize social value. So, they invest in companies they believe contribute to making the world a better place. 

Sustainable or responsible investing, which considers financial and social returns, has become increasingly popular as more people align their investments with personal values. This is particularly evident as the impact of climate change on people's lives and livelihoods becomes glaring worldwide and the demand for social equity grows amid persistent social injustices. 

If you're an investor committed to the betterment of the world alongside financial returns, socially responsible investing (SRI) and environmental, social and governance (ESG) investing can help you invest in a way that reflects those values. Both let you invest in funds and corporations with a demonstrated commitment to environmental and social responsibility. But what are SRI and ESG? And how do they differ? Benzinga takes a deep dive into SRI versus ESG, explaining their similarities and differences and how both can help you build wealth via social and eco-friendly investing. 

What Is SRI?

Socially responsible investing goes beyond ESG by selecting or eliminating investments based solely on specific ethical considerations. SRI employs a screening process that allows investors to independently select investments based on ethical considerations and socially responsible behaviors. 

For instance, an SRI investor might allocate a fixed portion of their portfolio to companies involved in charitable causes while avoiding exchange-traded funds (ETFs) or mutual funds that own tobacco company stocks. 

Socially responsible investing integrates personal, religious or societal values into the investment process, enabling investors to support companies that align with their beliefs. An SRI investor will typically avoid stocks, ETFs and mutual funds from companies that:

• Produce socially harmful consumer goods like tobacco and alcohol 
• Manufacture weapons, firearms and ammunition
• Have a history of human rights abuses and labor violations within the organization and supply chains 
• Are involved in corporate practices that may harm the environment, like excessive carbon emission and pollution from industrial waste

Instead, they'll consider stocks and ETFs of companies that:

• Champion clean, green or renewable energy 
• Promote gender equality and women's empowerment
• Support education and literacy initiatives
• Advocate for diversity and inclusion in the workplace

This strategy helps investors foster positive changes in environmental sustainability, ethical labor practices, social justice and corporate governance. SRI aims to generate positive societal impact while achieving competitive financial returns.

Why Should You Choose SRI?

Investors today want to grow their wealth while making a positive impact. Socially Responsible Investing (SRI) has become a popular strategy for this purpose. It allows individuals to align their financial goals with their values. SRI focuses on supporting companies that excel at sustainability, ethics, or social equity. This investment approach offers a chance to support the future while also achieving financial gains. Here are three reasons why choosing SRI can be a beneficial choice for investors.

Positive Impact

Choosing SRI lets you invest in companies that focus on environmental sustainability, human rights, and ethical practices. This method helps investors match their financial goals with their values, supporting businesses working towards social and environmental improvements. SRI allows for investment in areas like clean energy, gender equality, and corporate transparency, making it possible to have a positive influence through investments.

Competitive Returns

A common misunderstanding about Socially Responsible Investing ( SRI) is that it compromises financial performance in favor of ethical principles. However, numerous SRI portfolios and Environmental, Social, and Governance (ESG) funds have shown solid financial returns, frequently exceeding those of conventional investment portfolios. As more companies acknowledge the significance of sustainable practices, they are better equipped to respond to market fluctuations and consumer preferences, which can result in growth and increased profitability.

Reduced Risk

Companies that focus on ESG criteria often manage long-term risks more effectively. For instance, firms with strong environmental standards are less likely to face regulatory fines or reputation issues. Companies with solid social policies may see higher employee retention and customer loyalty. Those with good governance practices tend to avoid fraud and mismanagement. Therefore, investing in these companies can lower exposure to financial risks, resulting in more stable returns over time.

What Is ESG?

Environmental, social and governance is an investing framework that evaluates corporate behavior, financial risk, progress-to-goal and long-term sustainability. 

Environmental criteria encompass a company's impact on natural resources, climate change, pollution, waste production and energy consumption. Social factors examine employee relations, human rights, community engagement, child labor and health and safety. Governance criteria assess leadership, shareholders’ rights, ethics, board independence, management quality, transparency and disclosure. 

The ESG strategy is not limited to current performance but also evaluates future improvement targets for long-term resilience.

ESG investors seek to align their portfolios with companies that demonstrate responsible and sustainable practices, aiming for positive long-term outcomes for both the environment and society. 

Companies integrating ESG into their operations are more appealing because ESG offers a comprehensive view of financial risks and opportunities. A significant portion of global sustainable investing occurs via ESG funds. 

Why Should You Choose ESG?

ESG criteria are important in today's business world. Prioritizing ESG demonstrates a commitment to ethics and sustainability. It offers real benefits for companies and investors. Stakeholders seek transparency and accountability. Organizations that integrate ESG can enhance their reputation, manage risks, and explore new market options. Embracing ESG fosters innovation and attracts talent. It also meets consumer demand for responsible products. These practices support long-term success and benefit society and the environment.

Risk Management

ESG practices assist companies in recognizing and managing risks connected to environmental concerns, social issues, and governance matters. Incorporating ESG into their operations allows businesses to reduce the chances of facing legal problems, regulatory fines, and damage to their reputation. Effectively addressing these risks helps create a stronger organization that can better handle unexpected challenges.

Sustainable Growth

ESG is important for sustainable growth. Companies can adopt environmentally friendly practices to reduce waste and lower energy consumption. These practices also increase operational efficiency. Social responsibility initiatives promote diversity, equity, and inclusion. This helps create a positive workplace culture and improves employee retention and productivity. Strong governance practices ensure effective leadership and accountability. Ethical decision-making supports innovation and long-term success in a competitive market.

Investor Attraction

ESG is becoming a significant factor in investment decisions. Investors want companies with strong ESG credentials. They see these companies as more stable and responsible. Many large institutional investors now require ESG disclosures. Companies that prioritize ESG principles often attract more capital on favorable terms. Aligning with ESG can make a company more appealing to shareholders, financial institutions, and customers who value responsible behavior.

SRI vs. ESG: Key Differences

Most investors confuse SRI and ESG investing. This is understandable because both strategies prioritize an investment's broader social and environmental implications. Here are some distinctions that might clarify these two sustainable investment strategies.

Investment Scope

SRI blends the ESG framework with specific ethics and value systems. It employs subjective criteria to rate an organization's social responsibility.

In contrast, ESG investing evaluates companies based on environmental, social and governance criteria. This is an objective assessment. ESG investing also considers how well a company adheres to these standards and how it impacts its market performance.

Investment Strategy

SRI prioritizes ethical considerations and values alignment. As such, it employs negative screening (or active inclusion and exclusion) to eliminate or include certain investments based on predetermined ethical guidelines.

For instance, an SRI investor may avoid investing in stocks, ETFs and mutual funds of companies involved in animal testing or gambling strictly because it doesn't reflect their values. Instead, they might invest in companies because they have a gender-diverse board of directors or are proactively reducing greenhouse gas emissions. This reflects a more targeted focus on aligning investments with specific ethical values or societal concerns. 

In contrast, ESG investing takes a broader and more integrated approach by considering various environmental, social and governance factors in investment analysis. Rather than simply screening companies in or out based on specific criteria, ESG investors assess how these factors may impact a company's long-term financial performance and sustainability positively and negatively. 

For instance, an ESG strategy might consider an oil and gas company a responsible investment if it continuously takes adequate measures to curb emissions in its operations, has a solid safety record and actively engages in infrastructural and human resource development in its community. Through this holistic approach, investors can assess a company's overall sustainability performance and potential long-term impacts on financial returns.

Historical Focus

SRI has a long history and is rooted in ethical principles dating to the 1960s. It is often associated with religious or socially conscious movements. It emerged as a way for investors to align their portfolios with their values and beliefs, often by avoiding investments in industries such as tobacco, alcohol or firearms. 

In contrast, ESG investing has gained prominence more recently, particularly in response to sustainability challenges such as climate change and social inequality. It evolved from a growing recognition that companies' environmental, social and governance practices can impact their long-term financial performance and resilience.

SRI v. ESG: Key Similarities

Besides the minor differences in strategy, SRI and ESG are similar sustainable investing practices. Some of the practical similarities between them are: 

Ethical Alignment

SRI and ESG investing ultimately seek to align investment decisions with investors' ethical values and societal concerns. This shared focus underscores the broader societal impact investors aim to achieve through their investment choices. By integrating ethical considerations into their investment strategies, both approaches contribute to fostering a more sustainable and equitable future for society.

Focus on ESG Factors

Both approaches consider environmental, social and governance frameworks when evaluating companies, aiming to assess their long-term sustainability and performance. ESG investing is primarily geared toward evaluating, implementing or integrating the ESG framework into investment decisions. SRI investing also employs this framework as a broader aspect of its subjective rating criteria. By leveraging the three ESG frameworks, investors can identify resilient and well-positioned companies for long-term sustainability and success.

Impact Investing

Both SRI and ESG investing seek to generate positive social and environmental impact alongside financial returns, emphasizing the importance of responsible corporate behavior. SRI investing prioritizes direct social impact and philanthropy. ESG investing broadens the scope to include a broader range of environmental and governance considerations. 

This expansion allows ESG investors to address systemic issues such as climate change, diversity and inclusion and corporate governance, thereby driving meaningful change on a larger scale.

Overall, SRI and ESG are complementary but slightly distinct sustainable investment strategies that can be employed to optimize investments in socially responsible organizations with greater yield potential. 

SRI vs. ESG: Choosing the Right Investment Fund for You

When choosing between SRI and ESG investing, you must consider their unique approaches and objectives. SRI investments typically exclude companies involved in socially harmful or controversial industries, aligning with investors' ethical values. SRI is your best option if you're inclined toward activism and willing to forgo specific investments that don't align with your beliefs. That may lead to a lower return as many companies, ETFs and mutual funds will not fit into your belief for socially and environmentally friendly investing.

ESG investing evaluates companies based on environmental, social and governance criteria. The core idea is to promote sustainable practices while earning returns. You should consider an ESG investment strategy if you're pro-socially and environmentally friendly investment practices but are more concerned with how they affect your returns.

Understanding these distinctions can empower you to make informed decisions that reflect your values, ethics and financial objectives. You can access many ESG and SRI funds directly through brokerage platforms, robo-advisers and investment apps. You can also employ a financial adviser for guidance in choosing the right SRI or ESG funds based on your investment goals and ethical values.

SRI vs. ESG: The Bottom Line

Understanding the differences between SRI and ESG investing is crucial for making informed investment decisions that align with your values and financial goals. Whether you prioritize ethical considerations or seek to integrate ESG factors into your portfolio, both approaches offer opportunities to invest responsibly. 

If you're concerned about how the ESG framework affects your bottom line, invest in ESG. But if you're willing to forgo potential returns in keeping with your ethics, consider SRI investing. That said, by carefully evaluating the characteristics, strategies and performance of SRI and ESG funds, you can choose the sustainable investment that reflects your values and contributes to a more sustainable future.

Frequently Asked Questions