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ESG, SRI, and impact investing: what’s the difference?

As you might expect with a new and evolving area of investing, there are a number of ways to describe ethical investing.

Environmental, social, and governance investing

Environmental, social, and governance, or ESG, captures the three most common aims for people investing ethically.

A potential investment’s environmental impact is important to many investors.  That might mean avoiding fossil-fuel-based businesses such as the oil and gas industry, for example.  Or it could involve seeking out investments that actively benefit the environment, such as renewables companies and green technologies.

The social component of ESG investing is focused on the impact a company makes on its customers, suppliers, and staff.  This might include, for example, considering a company’s commitment to diversity in the workplace, or how much responsibility it take for the labour practices in its supply chain (for example in the retail and fashion industries).

Lastly, there’s governance.  An investor concerned with governance might ask questions about how much tax a company pays, how much the board of directors are paid, or how long the management team has been in place.

Socially responsible investing

Socially responsible investing, or SRI is another term for screening investments using ethical criteria.  Some investments use the UN’s framework, which sets out ten principles of socially responsible investing, covering human rights, labour practices, the environment, and anti-corruption.  The SRI funds available from Vanguard are based on these criteria, for example.

Impact investing

Most ethical investing aims to deliver ethical benefits without sacrificing financial returns (read more here).  But impact investing can also refer to putting money into ventures which don’t aim for a financial return, such as non-profits, social projects and charities.

Don’t drown in the jargon

However you choose to describe it, at heart ethical, impact, SRI and ESG investment approaches all seek to look wider than pure profit as a measure of your investment or pension.

Ethical investing a relatively new area of the Irish investment industry, and the standards are still being worked out.  What we can be sure of is that the investment and pensions industry in Ireland has a growing obligation to explain to its customers how their activities can be sustained into the future.  And that’s good news financially as well as ethically.

 

Read on: What returns are available through ethical investing?