ESG versus SRI: Successfully aligning your investments and values (2024)

A growing number of investors today want their money to do more than just multiply; they want to invest in companies they believe are helping to make the world a better place.

This growing trend of seeking out both financial and social returns — known asresponsible or sustainable investing— is being driven in part by Millennials who want toalign their investmentswith their personal values.As they start to accumulate wealth, many Millennials are putting their money into companies and funds with a strong environmental, social and governance (ESG) track record. Examples include organizations with a diverse board and management team, companies that work proactively to reduce waste, water and emissions, or that give back to communities by creating long-term jobs or building schools to help educate future generations.

“Many of the Millennials we work with today want to know that what they’re investing in is having a positive impact. It’s not just about achieving returns, but also incorporating their core values into the process,” says Gregory Yong, a relationship manager at RBC Wealth Management in Singapore. “They have a view about what they’re passionate about, such as electric cars, promoting clean water or giving back to communities — and they put at least some of their money into places where they feel it can make a difference.”

In fact, investors in their 20s and 30s are almost twice as likelyto put their money into companies or funds that target positive environmental or social outcomes, according to a recentErnst & Young report.It also says 29 percent of Millennials are looking for a financial advisor who offers this type of values-based investing. “Since Millennials are poised to receive more than US$30-trillion of inheritable wealth, sustainable investments will continue to grow in demand,” the report states.

SRI versus ESG

The most common types of sustainable investing are socially responsible investing (SRI), which excludes companies based on certain criteria, and ESG, a more broad-based approach focused on protecting a portfolio from operational or reputational risk.

With SRI, investors pick stocks or funds based on a set of standards such as positive or negative screening, the level of shareholder engagement or community/impact investing. With screening, for example, investors may eliminate a company from a portfolio if it’s involved in weapons contracting, tobacco or gambling. On the other hand, a company might be included if it has a gender-diverse board of directors, or a strong track record of reducing greenhouse gas emissions.

ESG investing considers a broader set of due diligence questions on how environmental, social and governance factors impact performance, both positively and negatively. For instance, an oil and gas company might be considered a responsible investment if it’s working continuously to reduce emissions in its operations, has a strong safety record and is giving back to the communities where it operates.

Screening is the largest sustainable investment strategy worldwide, valued at about US$15-trillion, according to theGlobal Sustainable Investment Review 2016, released by the Global Sustainable Investment Alliance (GSIA). ESG integration was next at about US$10.4-trillion followed by corporate engagement/shareholder action at nearly US$8.4-trillion. The report says ESG integration dominates in Asia (not including Japan), North America and Australia/New Zealand, while corporate engagement and shareholder action is the dominant strategy in Japan and negative screening is most prominent in Europe.

Investors seeking sustainable investing options

ACFA Institute reportshows 85 percent of investment professionals in Europe, the Middle East and Africa are most likely to take ESG issues into account in their investment analysis and decisions, followed by 81 percent in Asia Pacific and 68 percent in the Americas.

ESG investing is already integrated into many institutional mandates in Europe, while institutional investors in Asia are, “Increasingly look for asset managers with ESG capabilities,” according to a reportby PwC.It also points to a growing number of studies showing that companies with strong ESG credentials outperform those with weaker performance. What’s more, companies are getting better at disclosing their ESG performance.

“This virtuous combination of burgeoning demand and investment rationale will drive the ESG asset pool’s rapid growth,” the report states. “It’s not only active managers pushing for better management of ESG issues; passive investors are also requesting this as part of their public commitment to longterm value creation.”

PwC also notes that sustainable investing is quickly gaining traction across age groups and wealth classes.

Ai Ling Toh, associate director, RBC Wealth Management in Singapore, has noticed many Baby Boomer investors are being encouraged by their Millennial children to pay closer attention to ESG performance in their portfolios.

“Millennials are quite different than their parents,” when it comes to investing style and approach, she says. For instance, Toh has a Millennial client who is very passionate about protecting and providing clean water in developing countries. To back his beliefs, the investor has put some of his money into investments that help to provide fresh water to communities in need. “It’s these investors who will often identify companies they feel are more socially responsible and discuss them with their parents, and with us,” she says.

How to spot sustainable companies

For investors looking to align their values with their investments, Yong recommends working with an investment professional who can help pinpoint companies with a strong ESG track record. Investors can also track and monitor companies on their own, but Yong warns the process can be complex.

“A lot of these things are intangible,” Yong says. “It’s not something you can immediately find by looking at the financial statements, for example.”

The good news for responsible-minded investors is that more companies are reporting their ESG targets and performance on a regular basis. Investors can sometimes find this information in annual reports, or some companies produce separate corporate social responsibility reports focused on ESG targets and performance.”More and more, regulators are requesting companies be more transparent with their ESG values,” Yong says.

A growing number of companies are also providing voluntary disclosure through organizations such as theGlobal Reporting Initiative, which has developed sustainability reporting standards, or the Carbon Disclosure Project, a not-for-profit charity that runs a global disclosure system for investors, companies, cities, states and regions to manage their environmental impacts.

“For clients who are into this, one way is to get engaged and to educate yourself,” says Yong. “Clients who have a view about what they’re passionate about may then apply it to create a more ESG-focused portfolio.”

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ESG versus SRI: Successfully aligning your investments and values (2024)

FAQs

ESG versus SRI: Successfully aligning your investments and values? ›

SRI versus ESG

What is the difference between SRI and ESG investment? ›

ESG looks at the company's environmental, social, and governance practices alongside more traditional financial measures. Socially responsible investing involves choosing or disqualifying investments based on specific ethical criteria.

What is the difference between ESG and sustainable investment? ›

While both ESG and sustainability are concerned with environmental, social, and governance factors, ESG focuses on evaluating the performance of companies based on these factors, while sustainability is a broader principle that encompasses responsible and ethical business practices in a holistic manner.

What is the difference between ESG based investing and impact investing? ›

Impact investing is more focused and deliberate in seeking investments with a specific social or environmental outcome. In contrast, ESG investing considers a company's ESG factors and traditional financial metrics. This is one of the main differences between ESG and Impact investing.

Does ESG investing actually make a difference? ›

ESG funds have similarities to other funds

While the results from these time periods have been generally encouraging for ESG funds as a whole, we don't see convincing evidence that ESG funds are reliably better than non-ESG funds.

Is ESG the same as SRI? ›

SRI is a type of investing that keeps in mind the environmental and social effects of investments, while ESG focuses on how environmental, social and corporate governance factors impact an investment's market performance.

Do SRI funds outperform the market? ›

In this article, we use a meta-analysis to examine the performance of socially responsible investing (SRI). We find that, on average, SRI neither outperforms nor underperforms the market portfolio. However, in line with modern portfolio theory, we find that global SRI portfolios outperform regional subportfolios.

How do you tell if an investment is ESG or not? ›

Look at ESG scores

While it's true that there's no universally used system for rating ESG companies, there are still many tools that rate and score companies based on their adherence to ESG criteria. Companies that offer these services include S&P Global, Sustainalytics, MSCI and Refinitiv.

Why do investors prefer ESG? ›

Investors increasingly believe companies that perform well on ESG are less risky, better positioned for the long term and better prepared for uncertainty.

What qualifies as an ESG investment? ›

ESG stands for environment, social and governance. ESG investors aim to buy the shares of companies that have demonstrated a willingness to improve their performance in these three areas.

What is the new term for ESG? ›

The ESG moniker has become so politicized that it now prevents clear-headed thinking, said Alex Edmans, who teaches at London Business School. He's instead proposing the term “rational sustainability.” It may be bland, he said, but sustainability is about producing long-term value—and that's hard to politicize.

How does ESG affect investors? ›

A higher ESG score thereby helps in identifying equity stocks that result in higher shareholder wealth. This helps both companies and investors in deciding whether to focus on individual factors of ESG or identify the score that is possibly more important from an investor's point of view.

What is the opposite of ESG investing? ›

The term anti-ESG investing is somewhat subjective. For some proponents, anti-ESG investing is about maximizing profits without regard to a company's governance factors or its impact on society and the planet. These investors often argue that a company should be evaluated solely on the basis of financial performance.

What are the downsides of ESG? ›

However, there are also some cons to ESG investing. First, ESG funds may carry higher-than-average expense ratios. This is because ESG investing requires more research and due diligence, which can be costly. Second, ESG investing can be subjective.

Why is ESG criticized? ›

One of the biggest criticisms of ESG is that it perpetuates what it was partly designed to stop – greenwashing.

What is the controversy with ESG funds? ›

Some supporters think the term has become so broad as to lose much of its meaning. Many point to the prevalence of greenwashing, which is when companies exaggerate the environmental benefits of their actions. Other criticisms focus on the way fund managers rank companies by how they're performing on ESG factors.

What is SRI in investing? ›

Socially responsible investing (SRI) is an investing strategy that aims to generate both social change and financial returns for an investor. Socially responsible investments can include companies making a positive sustainable or social impact, such as a solar energy company, and exclude those making a negative impact.

What does SRI stand for in impact investing? ›

Socially responsible investing is the practice of investing money in companies and funds that have positive social impacts. Socially responsible investing has been growing in popularity in recent history.

What is the difference between ESG investing and ethical investing? ›

Often, it means filtering out certain types of companies and sectors – usually 'sin stocks' like tobacco products and companies involved in animal testing. The significant difference between ESG and ethical investment is that the latter focuses more on subjective, moral judgements than performance considerations.

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