Responsible Investing: Terminology and Background

May 9, 2016 |
1 minute read

The terms socially-responsible investing (SRI), mission-related investing, impact investing and environmental, social and governance (ESG) investing – all frequently grouped under the heading of responsible investing – have become a familiar part of the vocabulary of institutional and retail investors.

Just what these terms mean in practice, however, and how their practitioners’ claims can be impartially assessed, has been less clear.

Responsible investing can be broken into three main categories:

Socially-responsible investing (SRI)

A portfolio construction process that attempts to avoid investments in certain stocks or industries through negative screening according to defined ethical guidelines.

Impact investing

Investing in projects, companies, funds or organizations with the express goal of generating and measuring effecting mission-related social, environmental or economic change alongside financial returns.

Environmental, social and governance (ESG) investing

Integrating the three ESG factors into fundamental investment analysis to the extent that they are material to investment performance.

While these terms may all be gathered under the term responsible investing, these approaches serve very different purposes. SRI and impact investing use funding and investment activities to express institutional values or advance the institution’s mission. In contrast, ESG investing aims to improve investment performance, thereby making additional resources available for mission support.

For a long time, SRI was by far the most widely-used of the three approaches. In recent years, however, it has been argued that, although negative screening can be a useful tool for institutions desiring to express ethical, religious or moral values through their investment portfolio, for many it may prove too restrictive. ESG analysis, on the other hand, takes a broader view, examining whether environmental, social and governance issues may be material to a company’s performance, and therefore to the investment performance of a long-term portfolio.

Thus, while not every institution will choose to engage in SRI or impact investing, fiduciaries of long-term institutional investors should seek to develop a well-reasoned view on their institution’s approach to ESG investing.

Learn more on ESG and SRI factors

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