This article was written by Reuben Honey and takes a look at the differences between ESG Investing (Environmental, Social, and Governance) and SR Investing (Socially Responsible Investing).
An ESG Global Study 2022 study by Capital Group* suggests that 89% of investors believe that ESG factors are important to their investment decisions.
When it comes to the environment I am a big believer in the saying, “We can all do our little bit”. But what can be done, and what is the difference between ESG investing and SR investing?
ESG investing
ESG investing (Environmental, social, and governance) is about finding companies that are good for the planet, people, and profits and many funds now offer investment products that employ ESG principles.
ESG is like a three-legged stool:
- Environmental: How does the company impact the environment? For example, do they use renewable energy? Do they have a strong track record of reducing emissions?
- Social: How does the company treat its employees and customers? For example, do they have a diverse workforce? Do they have fair labour practices?
- Governance: How well is the company managed? For example, does it have a strong board of directors? Does it have transparent financial reporting?
SR investing
SR investing (Socially Responsible Investing) is about finding companies that align with your personal values, be they social, moral, environmental, etc.
SR investing is more personal to you:
- Environmental: You might avoid investing in companies that pollute the environment or contribute to climate change.
- Social: You might avoid investing in companies that produce harmful products or that have unfair labour practices.
- Governance: You might avoid investing in companies with a history of scandals or corrupt management practices.
So, which one is right for you?
If you’re looking for a broad approach to sustainable investing, ESG is a good option because it considers a wide range of factors, allowing investors to diversify their portfolios and reduce risk.
If you’re looking for a more personalised approach, SR investing may be a better option because SR investing allows you to choose companies that align with your specific values and interests.
Another way to look at it is…
Imagine you’re looking for a new friend. ESG is like looking for a friend who is kind, intelligent, and successful. SR investing is like looking for a friend who shares your values and interests.
* https://www.capitalgroup.com/about-us/news-room/esg-global-study-2022.html