Gregory Voetsch
About
Consumers today have become more conscious of social and environmental issues. Many consumers today make purchasing decisions based on the social and ecological commitment of the brand.
Modern investors are no different. Many investors want to ensure their money has a positive impact on the environment and society. A wave of responsible investing has swept across the globe and shows no sign of slowing down.
Responsible investing isn’t as straightforward as many believe. Various processes help investors identify the best investments for them. These include impact investing, ESG, and SRI, and this article discusses these investment approaches.
Impact Investing, SRI, and ESG – Are They Different?
With today’s socially and environmentally conscious investors, investing is about much more than the returns of the investment. More investors today want to use their money to make a positive impact. Investors are, therefore, becoming increasingly interested in companies and projects that uphold socially responsible and sustainable practices.
Today Consumers Are Looking At More Than Profits, They're Looking At Sustainability | Gregory Voetsch
There are various strategies available for investors to ensure their funds make a positive impact. The main investment processes include environmental, social, and governance (ESG), impact investing, and socially responsible investing (SRI). Although these terms often get used interchangeably, they don’t mean the same thing.
Environmental, Social and Governance (ESG)
It refers to practices of investments that may have an impact on the performance of an investment. Investments are analyzed based on environmental, social, and governance practices. Integrating these factors in the analysis of investments has enhanced financial analysis of investments. Investors are now able to go beyond technical evaluations to identify potential opportunities and risks. It is vital as financial performance remains as the main objective of any investor. ESG evaluation enhances the decision-making process for investors.
Socially responsible investing (SRI)
It takes ESG even further. It selects or eliminates investments based on specified ethical guidelines. These guidelines may depend on political beliefs, personal values, or even religious values. SRI applies ESG factors to determine whether investments are positive or negative based on ethical screens. An investor, for example, may choose to forgo investing in an ETF that invests in companies that are actively engaged in the production of firearms or that do not provide their workers with proper working conditions. Their reason for not joining the venture depends on conflicts in beliefs.
Some of the most common SRI screens include the production of firearms, gambling, production of addictive substances such as alcohol or tobacco, labor violations, human rights violations, environmental damage, and affiliation to terrorist groups.
Just as with ESG, making a profit is still vital for investors using the SRI model. However, for these investors, performance must be balanced against ethical principles. The goal of SRI is to help investors get returns without violating their conscience. Gregory Voetsch
Impact investing
For investors that apply impact investing, the outcome of their investment is the most crucial factor. The result here doesn’t refer to profit but to having a positive impact on society or the environment. The objective of the investor is to help businesses or organizations accomplish goals that are beneficial to the environment or society. For example, an investor may invest in research and development of renewable energy. Their primary concern is the successful development of a clean energy source. They may or may not make a profit from their investment.
Which way to go
Gregory Voetsch. The move to making responsible investments is growing around the world. Many investors currently own assets that are considered responsible. Many more are considering converting their entire portfolio into one that consists purely of responsible investments. That is more pronounced amongst millennials who are more conscious about social and environmental issues.
However, the complexities of making responsible investments make the move challenging. Evaluating investments to ensure they meet the criteria of responsible investments varies for different countries and individual investors. However, as interest in these types of investments grows, advisors are stepping in to help investors make more informed choices. The growth of responsible investing is not about to slow down any time soon