SRI vs. ESG vs. Impact Investing: What’s the Difference?
By Renew Capital | Fri Dec 16 2022
In recent years, investors have been investing not just for the potential financial returns but because they want their money to fund companies that create a better world. There are several investment terminologies that fall under what’s called “sustainable investing,” such as ESG, SRI and impact investing, which we’ll define later.
Although SRI, ESG and impact investing are often used interchangeably, a closer look at these terms will show you that they mean different things.
What Is Sustainable Investing?
Sustainable investing is an investment practice in which investors aim for financial returns while promoting long-term environmental or social values. It involves investing in progress and realizing that companies fixed on solving some of the world's biggest challenges can be positioned for significant growth. Today, investors are embracing sustainable investing even amid the pandemic. One survey by Morgan Stanley found that 80% of asset owners said they actively integrated sustainable investments into their portfolios in 2019.
Some strategies that fall under the sustainable investing category include environmental, social and governance (ESG), impact investing and socially responsible investing (SRI). But what’s the difference between ESG and impact investing? Is there a difference between sustainable investing vs. impact investing? What is socially responsible investing?
In this blog, we distinguish ESG vs. socially responsible investing vs. sustainable investing vs. impact investing.
What Is Environmental, Social and Governance Investing?
ESG investing is a form of sustainable investing that considers environmental, social and governance factors to screen potential investments.
The environmental branch of ESG considers a company's impact on the environment. This may include a company's carbon footprint, green energy initiatives, waste management and sustainability efforts that make up its supply chain.
The social aspect of ESG investing examines a company’s unique actions towards promoting employee diversity, equity, and inclusion, human rights and fair labor practices.
Governance considers how a company is run and how its management team influences positive change. It considers factors such as diversity in leadership, political contributions and large-scale lawsuits.
What Is Socially Responsible Investing?
ESG investing is similar to socially responsible investing. However, SRI investors go a step further by excluding businesses that conflict with their ethics. Common SRI exclusions include companies that manufacture firearms and produce fossil fuels. Socially responsible investing is the practice of making sustainable investments into companies that have a positive impact on society. SRI investors assess an investment’s financial outlook while prioritizing its social value. While some investments may have the potential for high financial returns, it may not be socially responsible, and vice versa. Socially responsible investments often reflect the trends of the time. For example, in the 1960s, investors targeted companies that promoted civil and women’s rights. As society positively changed, awareness shifted towards new matters such as global warming. For this reason, SRI carries unique risks and may be better viewed through the lens of ESG factors because social values tend to fluctuate.
What Is Impact Investing?
Impact investing is an investment strategy that focuses on companies that aim to make measurable social and/or environmental impacts in the world while also generating financial returns. Impact investors may inject capital into emerging markets, choose funds dedicated to alleviating poverty and invest in other causes not addressed by the public financial markets. Estimates by the Global Impact Investing Network (GIIN) suggest that the impact investing market size amounts to over $1 trillion now—an industry milestone. The impact investing market provides capital to address major global challenges in sectors such as renewable energy, sustainable agriculture, microfinance, conservation and other causes that reduce the negative impact of business activity on the social and natural environment. The difference between ESG and impact investing is that impact investments must produce a quantifiable social good, while environmental, social and governance factors are part of an investor's assessment process. Another difference is that impact investing refers to private funds, while SRI and ESG investing involve publicly traded assets.
Sustainable investing vs. impact investing: Is there a difference? Not necessarily. In short, sustainable investing is a broader category that impact investing falls under.
How to Begin Impact Investing in Africa
The importance of sustainable investing solutions cannot be overemphasized. As a sustainable investor, you’re not only asking, “Is sustainable investing profitable?” but “Is this investment making a positive difference in the world?” By putting their capital to work, investors can create a more sustainable, socially responsible future.
Now that you know the differences and definitions of sustainable investing vs. impact investing vs. ESG vs. SRI, are you interested in pursuing investments that fall into these categories?
Sustainable investing models may be of interest to investors looking to leave a legacy. At Renew Capital, we aim to connect investors with African entrepreneurs to accelerate their business growth. By impact investing in Africa, investors will not only have the opportunity to make a meaningful, measurable difference in the life of an African entrepreneur but also the world at large. Renew Capital Angels™ is an active community of accredited investors* seeking sustainable social impact in Africa alongside financial returns. Apply to become an angel investor today.
*Applicants to the Renew Capital Angels network must be accredited investors per the U.S. Securities and Exchange Commission definition. In addition, applicants should understand and be able to handle the risks involved in investing in frontier markets.
This blog should not be viewed as investment advice, or as a solicitation of an offer to buy or sell securities or to adopt any particular investment strategy. Impact investing, and investing in frontier markets specifically, is speculative in nature and involves a high degree of risk. Investors should fully understand all risks and consult with their independent financial, legal and tax advisors to determine whether any particular investment or investment strategy is appropriate for them. Renew Capital does not make any recommendation regarding the appropriateness of any specific investment opportunity for any specific investor.