What is ESG Investing? 

Responsible investments have seen record inflows of new money in the last few years and yet,

we still don't know what exactly to call it...

ESG
SRI

Socially Responsible
Impact Investing
Sustainable Investing
Responsible Investing
Values based investing

What does it all mean and what is the difference? 
 

While there is no general consensus on what to actually call responsible investing, the top keyword search goes to "ESG Investing"

ESG Investing

Environmental

Energy Consumption

Pollution

Climate Change

Waste Production

Natural Resource Preservation

Animal Welfare

Social

Human Rights

Child and Forced Labor

Community Engagement

Health and Safety

Stakeholder Relations

Employee Relations

Governance

Quality of Management

Board Independence

Conflicts of Interest

Executive Compensation

Transparency and Disclosure

Shareholder Rights

ESG stands for Environmental, Social and Governance.

 

While this is often referred to as a type of investing, the term ESG actually refers to the data that is used for an investment screening tool

 

ESG factors are used to enhance traditional financial analysis by identifying potential risks and opportunities beyond technical valuations alone.

 

Companies report data around their environmental, social and governance impact. Investment managers use this data (often times) to build a "screen", helping them choose which companies to invest in or avoid.  

Someone who strictly wants to avoid certain stocks or sectors may want to avoid an ESG fund.

 

While many ESG funds seek to buy companies that are at the top of their class in either Environmental, Social or Governance. These funds sometimes invest into companies with lower ESG scores in an attempt to incite change from within.

SRI Investing (Socially Responsible)

SRI means you’re looking to make a financial profit while also maintaining your values

 

Socially Responsible Investing and is the oldest form of responsible investing. 

 

If you want to get real nerdy, this goes back to Biblical times and beyond. The first books of the bible referred to the Jewish concept called Tzedek (justice and equality) and how it should be used to govern all aspects of life. Owners had rights and responsibilities in how their holdings were used and were instructed to prevent potential harm.  

 

This idea is one of the founding principles of Socially Responsible Investing. Much of the early Socially Responsible Investing revolved around faith based investments.

 

Whether this meant a Jewish investor being prohibited from investing into “immoral” companies or Islamic Sharia Compliant finances meaning money should be a medium of exchange and not an asset that grows over time. 

 

Primarily now, socially responsible investing revolves around avoiding sin stocks.

 

Companies that deal in alcohol, tobacco, firearms, oil or gambling.

 

This “exclusion” based investing is now a bit old school and unfortunately, many of our negative stigmas associated with responsible investing stem from this branch of investing. 

Impact Investing

Impact investing is the act of prioritizing a social return over a financial return.

 

This means an investment that is focused first on the social good. These types of investments tend to be more private placements with a bit more due diligence involved.

 

This may mean an investment fund that invests directly into minority owned businesses, affordable housing or a number of other “social goods”.  

 

By in large, impact investments are not the type of investment that many of us will be making with our dollars since we mostly need every bit of financial performance we can get to achieve our financial goals. 

 

That does not mean we should ignore impact investing. Consider this the leading edge of sustainable investing. 

 

Many of the dollars invested into impact investments are from wealthy individuals, foundations or accredited investors.

 

These are people who can have a bit more appetite for “risk” since they are not counting on every dollar for their livelihood.  As a result, impact investments can invest into things that most of us would not be able to.

 

Oftentimes, this can lead to innovation in the investment world.  

Image by Tony Hand

Now that you know what ESG Investing is, 

Learn Five reasons why you should be using ESG Investments

If you're convinced that ESG investing may be a good idea for you, but don't know how to get started feel free to schedule a phone call.  We're happy to help...

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