Investors in the modern-day world are shifting and adopting social responsibility in the ways they invest. These investors are no longer just interested in the gains and profits they get, but their contribution to society. A survey conducted in 2018 revealed that over $1 in every $4 was accounted for by impact investing and socially responsible investing.
Three different investment styles fulfill the growing demand for investors’ need for both stock and social funding. These include:
- Environmental Social Governance (ESG)
- Socially Responsible Investing
- Impact Investing
Although these three styles have a common goal, they differ in the structuring of client portfolios and investment options. So, what are some of these differences?
Environmental Social Governance (ESG)
ESG sets forth a mechanism that evaluates the environmental, social, and governance strategies, practices, and risks of given organizations. These risks are useful in the evaluation of the company’s sustainability in terms of worth and price. The investors also check the practices that may violate the overall responsibility of the company towards the community.
Some of the factors considered by ESG on environmental responsibility include:
- Consumption of energy,
- Waste production,
- Climate change,
- Animal welfare
- Preservation of natural resources.
On social responsibility, the strategy considers the following factors:
- Forced labor and child labor
- Health and safety
- Human rights
- Employee relations
- Community engagement
- Relations with stakeholders
Scores on governance are factored based on the following:
- Conflicts of interest
- Management quality
- Issues of transparency and disclosure
- Rights of the shareholders
Socially Responsible Investing (SRI)
Socially responsible investing has its origins in public markets where responsible investing gained emphasis. This approach used extensive investment screening and exclusion mechanisms to avoid investing in companies with harmful economic and social exposure. The strategy also leads to investing in companies with charitable fronts that help the communities.
Some of the screens SRI conducts, seek to avoid companies affiliated with terrorism, human rights violations, and addictive substances. It also negatively screens organizations involved in the manufacture of weapons, gambling, and whose activities damage the environment.
In this approach to investing, the primary factor of consideration is the outcome of the investment. It aims to assist the funded organizations in achieving positive goals and strategies that will help the communities and the environments.
The approach seeks to positively impact the financial, social, and environmental well-being of society. The investors use different strategies in tracking outcomes, which include access to essential services, women empowerment, environmental sustainability, quality of jobs, and affordable housing, among others.