As Socially Responsible Investing (SRI) continues to evolve, it remains a hot topic with investors, investment fund managers, plan sponsors, and plan participants alike. Gone are the days when responsible investing meant simply steering clear of buying shares of companies in industries like tobacco, firearms, or gambling. Now, investors can make investment decisions through assessing a broad range of corporate behaviors across all industries. These behaviors fall into three categories – environmental, social, and governance or ESG. The acronym ESG is the latest stage in the evolution away from merely screening out industries or companies. It’s also a step beyond “themed-based” narrow objectives such as focusing on a clean water or climate change fund.
SRI Investment Market has grown from $2.83 billion in 2015 to $17.67 billion through November 2019
Most ESG portfolios not only avoid certain business areas of interest, they integrate industry-specific factors (i.e. reduce the use of plastic or increase privacy and data security or decrease the effects on climate change) into the fundamental research process and thus favor companies that actively promote best practices on ESG issues. As a result, ESG investing is sometimes also referred to as “impact” investing.
Impact investing considers many factors and therefore results in a myriad of options structured around those varying factors. Looking at the various aspects helps to explain some of the ambiguity that ESG investing entails.