As an investor, you have countless decisions to make about your portfolio, especially when it comes to selecting individual stocks. Risk and return are just two factors to consider, but many more variables may impact what investment vehicles you choose.
For example, you can choose what companies you want to invest in based on their values and responsibilities. Two of the most common values-based standards are Socially Responsible Investing (SRI) and Environmental, Social, and Governance (ESG) investing. These types of investing have been gaining traction, and they can be helpful lenses to look at companies' business models to evaluate long-term sustainability.
Let's learn more about these two standards, the differences between the two, and help outline the freedom you have as an investor who wants to learn more about ESG or SRI investing.
What is Socially Responsible Investing (SRI)?
Socially responsible investing is an investing strategy in which investors choose their portfolio based on a company’s demonstrated social responsibility. SRI is also known as values-based investing, sustainable investing, or ethical investing. As the world continues to change, many investors are seeking to create a more sustainable and ethical portfolio, and SRI is a strategy to do just that.
The exact definition of SRI can vary from individual to individual because everyone has a slightly different definition of values-based investing. For example, one investor might be focused on investing in minority-owned businesses or businesses that are actively working to reduce their carbon footprint, while other investors are focused on investing in companies that value their employees and support human rights and fair labor practices.
Some common SRI screens include:
- Alcohol, tobacco and other addictive substances
- Production of weapons and defense tools
- Conflict/war affiliations
- Human rights and labor violations
- Environmental damage
What is Environmental, Social and Governance (ESG) Investing?
Like SRI, Environmental, Social, and Governance (ESG) investing is a strategy that allows investors to build a more ethical portfolio. Unlike SRI, however, ESG is clearly defined in what it includes, and these criteria are directly tied to a company’s performance rather than personal values. Environmental factors refer to how well the company conserves resources. Social factors refer to how the company treats individuals both inside and outside the company. Governance factors refer to how the company is operated.
Here are some factors to consider for each category:
- Carbon emissions
- Air and water pollution
- Water use
- Fossil fuel/green energy use
- Employee diversity
- Customer satisfaction
- Employee protection
- Sexual harassment and protected class policies
- Fair labor practices
- Human rights
- Board member diversity
- Executive salaries
- Conflicts of interest
- Shareholder rights
Some investments have an ESG score, which determines how well they adhere to the above guidelines. While SRI has some flexibility depending on the investor, ESG guidelines are clearly outlined for companies to follow.
What are the Differences between SRI and ESG Investing?
As you can see, ESG criteria are a little more specific than general SRI investing, while SRI investing depends on the individual investor. SRI may use specific ESG guidelines, but it can also go beyond ESG. Additionally, an SRI portfolio can be specifically tailored to your preferences. As a result, in today’s investing world, your portfolio can be as individual as you are.
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