The difference between ESG, SRI, and Impact Investing.
Get clarity on how to align your investments with your values.
If you’ve ever purposefully purchased an eco-friendly product, supported a local small business, or donated to a charitable cause, you already know that the dollars you spend can help build a better future, for your community and beyond.
Your investments can do the same thing — aligning with your values and having a positive impact — while still generating a return. There are a wide variety of approaches for sustainable investing, and deciding how to incorporate them depends on your goals and needs. We’re covering the basics of three similar but subtly different strategies — environmental, social and governance (ESG) investing, socially responsible investing (SRI), and impact investing — to help you understand your options.
Environmental, Social and Governance (ESG) Investing
As the name suggests, ESG investing uses a framework that takes into account three factors when selecting which companies to support: environmental (the effects on the earth), social (the impact on society), and governance (how the company is run). You can focus on one area or all three, and there are even themes within each — from alternative energy to women in leadership.
There are several companies that calculate and publish ESG scores for corporations, which makes it possible to consider a company’s ESG metrics as part of an investing decision, similar to how their performance would be evaluated. There’s no rule to say how much weight you should give to a company’s ESG score versus traditional financial analysis, but many investors consider both elements as part of their ESG investing strategy.
Socially Responsible Investing
While ESG provides an extra layer of evaluation alongside traditional financial analysis, socially responsible investing tends to be more rigid in applying ethical guidelines to your investment decisions. It can involve excluding stocks that don’t align with your beliefs, or you can also use positive inclusion — giving your investment dollars to companies that perform better than industry peers on ESG attributes.
So, if a tobacco company has a stellar performance, an ESG investor might still consider that as part of their investment decision. In contrast, a socially responsible investor who draws the line at tobacco will refuse to invest in any stocks that benefit a tobacco company, regardless of how well they do.
As the name implies, the goal of impact investing is to generate a measurable impact in an area of need — and that can range from environmental to societal concerns, depending on your personal values. It goes the furthest to tie your personal values to your personal capital, as typically you’ll be prioritizing the positive effects of your investments over your financial returns.
That doesn’t mean you can’t generate gains with impact investing, they’ll just be weighted with less importance compared to the specific positive impact that comes from your investment — so you might only get back the capital you put in, or see returns below market rates. Areas like conservation, microfinance, and providing access to basic services like housing, healthcare, and education often fall into this category.
Which investing strategy is right for you?
If all these options sound very similar, that’s because they are. With ESG, SRI, and impact investing, you’re making a choice to consider environmental, social, and governance factors in your investing decision. From there, you can tailor your strategy based on how much weight you give to financial returns versus ESG factors, but you don’t need to think of these as mutually exclusive — making investments aligned with your values doesn’t necessarily mean forgoing returns.
If you’re not sure where to get started, BMO’s MyESG™ is an easy, interactive tool that helps you to recognize your approach to investing and what you value. When you’re ready to get started, the options span everything from ETFs, to mutual funds, to sustainable portfolios, and can be self-directed or guided by a financial advisor.
According to a recent report, the value of global assets applying ESG data to drive investment decisions was $40.5 trillion in 2020, more than tripling since 2012. That means the options available are growing, too — so all you need to think about is what is right for you.