What is the difference between ESG and SRI?
One big issue advisers face in ethical investment is explaining to clients the difference between ESG and SRI.
Confusingly, SRI stands for different things, including ‘Sustainable and Responsible Investing‘, ‘Sustainable, Responsible and Impact investing‘, and ‘Socially Responsible Investing‘. The latter is the most common and so is the one we will investigate here.
Happily, ESG investing stands for one thing only – Environmental, Social and Governance investing. Frustratingly, there is no universal definition of what these acronyms mean, in terms of investment strategy. According to Simon Howard, CEO of the UK Sustainable Investment and Finance Association (UKSIF), the main difference between ESG and SRI is intentionality.
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ESG investing is less about taking a moral stand and more about measuring the effect of these issues on corporate value. SRI goes further, by using investment strategies to promote sustainable development for the good of society. It could do this in many ways, including negative screening, positive inclusion and impact investing.
As this new area evolves from a concept to an investment reality, more precise definition is emerging. Various bodies – including the European Union, the Investment Association and British Standards – are working towards clearer definitions.
ESG should be part of managers’ fundamental research processes, because they want to invest in companies with good financial stewardship and long-term value. But SRI takes that further by positively promoting social and sustainability goals.