Implementation alternatives Individuals, governments and societies want corporations to behave in more ethical and sustainable ways. The rise in popularity of sustainable investing products shows that many investors feel the same way. It’s important to keep in mind that not all sustainable investing products are the same. There are many ways to implement a sustainable investing strategy. These include Socially Responsible Investing (SRI), Environmental, Social and Governance (ESG) investing and Impact Investing.
| Socially Responsible Investing | ESG Investing | Impact Investing |
| Strategy | Eliminate companies with involvement in undesirable industries. | Invest in companies with superior or improving ESG practices. | Invest in specific sustainable investments |
| Market coverage | Targeted industries excluded | Industries may or may not be excluded | Limited |
| Impact | Indirect | Indirect | Targeted and direct |
| Returns | Market | Market | At or below market |
Socially responsible investing (SRI) is a type of sustainable investing that excludes investments of companies’ that fail to meet an environmental, social and/or governance standard. SRI portfolios are often referred to as “sin-free” portfolios. There are many types of business activities that could be considered for exclusion. These activities include the production and distribution of adult entertainment, alcohol, military weapons, controversial weapons, fossil fuels, gambling, palm oil, tobacco and many others. The list of excluded investment is unique to each investor or investment product. If you buy an SRI ETF or mutual fund, the types of investments excluded may or may not match your preferred list of exclusions.
ESG The term ESG means Environmental, Social and Governance, but also refers to a number of sustainable investing strategies. These strategies attempt to pick investments of companies whose ESG practices are above average or whose ESG practices are improving. Best-in-class, tilting and thematic focus are among the subcategories. Keep in mind these subcategories are not mutually exclusive.
Best in class This type of ESG implementation attempts to pick companies with the best ESG metrics. One way of doing so is to pick the best companies within each industry. In this case, industries that are excluded from SRI investing are included, but only those with the best characteristics are included. Another way of implementing this strategy is to pick only companies with minimum ESG scores or potential for improvement. In this case, there may be some industries where no companies make the cut.
Tilting This type of ESG implementation overweights investments with high ESG metrics and underweights investments with low ESG metrics. Every investment in the market capitalization weighted benchmark is held, but weights are changed to reflect ESG metrics.
Thematic focus This type of ESG implementation focuses on a particular component of ESG, Environmental, Social or Governance.
Impact Investing Impact investing attempts to make a positive, measurable social and environmental impact along with financial returns. At times there can be a tradeoff between the environmental or social impact and the financial return, which means financial returns can be lower than that of the other types of investments. Investments are often in specific projects, such as a water sanitation project or a company developing an environmentally friendly technology. In this way, impact investing can be thought of as environmental and social venture capital.
Global resources The United Nations (UN), the Organization for Economic Cooperation and Development (OECD) and the International Labour Organization (ILO) provide guidelines, norms and additional resources.
