What are the Differences Between SRI and ESG?

June 19, 2018  | by Commonfund Institute

Industry Knowledge | Investment Strategy | Responsible Investing

The Challenges of Terminology

There are a great many terms referring in some way to practices related to responsible investing: socially responsible investing; mission-related investing; impact investing; integrated reporting; and investing according to environmental, social and governance principles. These terms are often grouped under the same category of responsible investing, but this generalization is misleading because it overlooks the fact that what these terms mean in practice is very different. This proliferation of terms is a complicating factor for many who are new to the field. Perhaps the two most common terms are SRI and ESG.

Socially responsible investing (SRI) has been around for a long time. Environmental, social and governance (ESG) factors are a relatively newer concept – coming into prominence in 2006 with the launch of the UN PRI (Principles for Responsible Investment). The terminology tends to be used loosely thereby causing confusion for many investors. Of course, the various aspects of SRI and ESG may be interpreted differently by some organizations, but here are a few basic differences.

SRI | Defining Characteristics

Principles Focus
Investments driven first by ethical values.

Use Negative Screens
Organizations prohibit investment in certain companies or industries depending on the investor’s criteria. For example, some health-related organizations prohibit investment in tobacco companies.

Narrow Definition
SRI is typically more narrowly defined by the investor. For example, divest the portfolio of the top 200 fossil fuel companies.

Different Criteria
SRI screens are different for different investors. Some organizations impose religious or ethical screens like no alcohol, gaming, or fetal tissue research companies. Tobacco screens are employed by some health-related organizations. Sudan, South Africa and weapons have been the focus of some divestment campaigns. But the key point is that different organizations have different priorities, so SRI criteria are not universal but very organization-specific.

ESG | Defining Characteristics

Returns Focus
The inclusion of long-term sustainability factors guides investment research to identify companies with higher investment potential.

No Negative Screens
Specific investments are not prohibited, but rather rankings are assigned to ESG factors for a company in any industry. These ESG rankings are used as part of the overall investment research process. Poor rankings do not necessarily exclude a company from investment but are cause for further evaluation and consideration.

Broader Definition
ESG incorporates a broad set of factors to guide security selection. For example, which natural resource companies are less likely to experience catastrophic events because of their environmental and safety practices?

More Universal Approach
ESG is still in development, so the application of these factors will evolve, but the theory is that certain factors have broad applicability to all investment options. For example, good governance, strong shareholder rights, and transparency are positives for investors in any company.

Connecting Investing and Mission

Commonfund has been a long-term advocate of the concept of intergenerational equity—the principle that endowments and foundations balance the needs of the present generation with the needs of future generations. This long-term approach to the sustainability of missions places great importance on the management of investment portfolios—giving your organization the best chance of fulfilling its mission now and in the future. We believe that organizations that do good must also do well in order to perpetuate their influence. By incorporating SRI or ESG factors into the investment process, organizations may provide additional support to their goal of doing well and doing good.

Learn more on ESG and SRI factors

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Disclaimer

Information, opinions, or commentary concerning the financial markets, economic conditions, or other topical subject matter are prepared, written, or created prior to printing and do not reflect current, up-to-date, market or economic conditions. Commonfund disclaims any responsibility to update such information, opinions, or commentary. To the extent views presented forecast market activity, they may be based on many factors in addition to those explicitly stated in this material. Forecasts of experts inevitably differ. Views attributed to third parties are presented to demonstrate the existence of points of view, not as a basis for recommendations or as investment advice. Managers who may or may not subscribe to the views expressed in this material make investment decisions for funds maintained by Commonfund or its affiliates. The views presented in this material may not be relied upon as an indication of trading intent on behalf of any Commonfund fund, or of any Commonfund manager. Market and investment views of third parties presented in this material do not necessarily reflect the views of Commonfund and Commonfund disclaims any responsibility to present its views on the subjects covered in statements by third parties. Statements concerning Commonfund’s views of possible future outcomes in any investment asset class or market, or of possible future economic developments, are not intended, and should not be construed, as forecasts or predictions of the future investment performance of any Commonfund fund. Such statements are also not intended as recommendations by any Commonfund entity or employee to the recipient of the presentation. It is Commonfund’s policy that investment recommendations to its clients must be based on the investment objectives and risk tolerances of each individual client. All market outlook and similar statements are based upon information reasonably available as of the date of this presentation (unless an earlier date is stated with regard to particular information), and reasonably believed to be accurate by Commonfund. Commonfund disclaims any responsibility to provide the recipient of this presentation with updated or corrected information. Past performance is not indicative of future results. For more information please refer to Important Disclosures.