“I Own What!?!?” Understanding Socially Responsible Investing, Sustainable Investing , ESG and Impact Investing
You probably wouldn’t eat processed food without knowing what it is and where it came from, and maybe not even then. Who knows if it’s good for you or whether it was created in a way of which you’d approve? So why eat it? But when it comes to your investments, it’s very likely you’re invested in the financial industry’s version of processed mystery meat.
With tens of thousands of people flocking to downtown Boston for the Boston Local Food Festival to learn about sustainable food and living, engage with food local producers, and enjoy local food in a sustainable way, it’s clear that people in Boston and beyond care greatly about their impact on the world and their communities. But for all the attention these ideas get when it comes to food and daily activities, their application in investing is rarely understood or considered, and even more rarely implemented by individuals or financial advisors.
If you want transparency and choice over what you’re invested in from more than financial perspectives, there are alternatives to typical portfolios and strategies to complement them that reflect your personal values. These alternatives go by a range of terms and acronyms, including; Socially Responsible Investing (SRI); Environmental, Social, Governance (ESG); Sustainable Investing; and Impact investing. Here’s a quick explanation of each to help you decide if any might be right for you:
Socially Responsible Investing (SRI)
SRI may be the broadest and most commonly used of the various terms, and could be considered a catch-all for the idea of both negative and positive screening based on any values that a person holds and wants their portfolio to reflect. Some broad and commonly requested values to guide investing are environmental, religious, public health (often screening out weapons, tobacco, gambling and alcohol) and social (reviewing human rights, labor practices).
Environmental, Social, Governance (ESG)
ESG is another broad term that overlaps with SRI, though it indicates a more specific focus on its designated areas. Environmental generally refers to a combination of factors including energy efficiency, environmental impact, and the sustainability efforts of companies. Social covers things like human rights, labor and consumer protections, and negative screening of industries based on public health values. Governance considers the responsiveness of a company to stakeholder (employees, shareholders, and customers) concerns, proper oversight of a company and its executives by its board, and the checks and balances in place to protect the stakeholders.
The focus of sustainable investing is on creating and supporting a sustainable global community. This means investing in companies and industries that use as few resources as possible or improve the efficiency of those resources, so as to preserve precious natural resources for future generations and the health of the planet. Sustainable investing also means trying to invest in ways that will help current generations pass on an equal or better quality of life to future generations, creating a sustainable future for everyone.
In some ways, impact investing is the wild west of the SRI world. The idea is not just to avoid the bad companies, industries, or countries, which is accomplished by screening companies based on certain factors you choose, leaving you with a well diversified portfolio. Impact investing instead tries to invest in companies, organizations, or even people that are working to make a direct positive impact in a particular area. These investments are often more concentrated and therefore riskier because of the specificity of the reason behind the investment. They may also be safe or only moderately risky investments but deliver a below market-rate return in order to help the cause, providing a combination of financial and personal reward rather than only financial. They can even be in the form of charitable donations with no expectation of financial return.
I’ll be covering these areas of SRI and more in greater detail in future articles. Sign up for the free Balanced Rock Report newsletter and be notified as soon as new articles are posted.