If you want to use investing to make a difference and a profit, you aren't alone. In fact, there are entire subsets of investing dedicated to the topic. The subsets are called ESG, SRI, and impact investing. While the subsets overlap in some ways, they are very different in other ways. So, what's the difference between the three subsets and how can you invest in each of them?
What is ESG investing?
ESG stands for environmental, social, and governance. ESG investing takes these three factors into consideration when determining how a company's practices alter the investment's performance.
This means that ESG investing still prioritizes profitability, despite the social awareness that surrounds it.
Interesting, I think the term works great. But I define ESG as being for the purpose of improving risk adjusted returns (Eg profit first) and reserve SRI and Impact Investing for indicating that one places values and impact on, at least equal footing, to profit.— Dave-o’-leartern 🎃 (@DavidPOLeary) September 19, 2020
Investments receive ESG scores, with a high score meaning that the security is more likely to profit and a low score meaning that it's more likely to flop.
Experts base the scores on a list of predetermined factors.
- Environmental factors include energy consumption, pollution, climate change, waste production, natural resource preservation, and animal welfare.
- Social factors include human rights, child and forced labor, community engagement, health and safety, stakeholder relations, and employee relations.
- Governance factors include quality of management, board independence, conflicts of interest, executive compensation, transparency and disclosure, and shareholder rights.
Some examples of ESG funds to invest in are the ESG U.S. Stock ETF (ESGV), the Global ESG Select Stock Fund (VEIGX), and the iShares ESG Aware MSCI EAFE ETF (ESGD).
What is SRI investing?
At a basic level, SRI (socially responsible investing) is one step up from ESG. Instead of making financial return the primary focus, ethical guidelines reign supreme.
The key factors that define SRI vary based on a person's values. The factors might be based on religion, politics, or personal beliefs.
Instead of using scores to predict market performance, SRI uses positive and negative screens. One example of a positive screen is green power. Examples of negative screens are child labor, weaponry production, or tobacco — just to name a few.
For SRI investing, profit still matters. However, investors also take ethical guidelines into consideration. Without adherence to values, profiting becomes unethical.
Examples of SRI funds to invest in are the Amana Growth Halal Mutual Fund (AMAGX) and the Invesco Solar ETF (TAN).
What is impact investing?
Impact investing is sometimes referred to as thematic investing. The goal is to produce a positive outcome as a result of invested capital.
For example, you might invest in solar power to promote research, development, and expansion. Or you might invest in companies with female leaders to help close the gender wage and wealth gaps.
It's up to you what specific impact you want to make. In the end, impact investors want to make a positive change in a particular sector.
Examples of impact funds to invest in are the Pax Ellevate Global Women's Leadership Fund (PXWIX) and Reinvestment Fund institutional investments.
Is meaningful investing actually profitable?
If you’re ever faced with someone arguing that ESG/SRI/Impact Investing experience lower returns, ask them to define what kind of returns they mean.— Dave-o’-leartern 🎃 (@DavidPOLeary) June 26, 2020
Almost certainly they will have never considered the fact that there are other forms of returns besides financial returns.
In 2018, sustainable and impact investing accounted for $12 trillion of the U.S. market or 26 percent of the pie. Sustainable or impact investing grew by 38 percent in just a year. Climate change and carbon emissions claimed the limelight. Larger alternative funds (worth more than $100 million) outperform smaller ones. Investing with impact in mind has proven to add financial value for both investors and investees.
It's hard to state the average return because so many impact investors still hold their positions. However, that's a good sign that this bull is in it for the long haul.