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ESG, SRI, Impact Investing… What’s in a Name?



We increasingly get questions from clients about having their portfolio do a bit more than just grow over the long term. Some clients have indicated a preference to avoid certain sectors of the market, others wish to invest only in companies that are good stewards of the environment, support social causes, or actively promote diversity and inclusion in their workforce. Still others wish to make a dedicated impact in how they invest their money, whether locally or globally. Below is a brief summary of some of the acronyms you may encounter in researching some of the solutions available in the marketplace.


Socially Responsible Investing (“SRI”)


SRI has been around the longest of these three main areas with its origins in the 1970’s. SRI’s growth was principally driven by foundations, endowments and pension funds with specific mandates to avoid investment in certain areas, the most prominent being divestment of “sin stocks” (alcohol, tobacco, firearms) in whole or part. Since then, several flavors have cropped up, the most popular today being divestment of fossil fuel holdings.


SRI investment strategies generally practice “negative screening” to satisfy their investors’ mandates. An SRI portfolio manager generally excludes those companies/sectors from their investing universe based on the investor’s mandate.


Environmental, Social & Governance (“ESG”)


ESG investing is a somewhat newer and more robust take on SRI. While negative screens may still be deployed, the portfolio manager also grades companies in their investment universe for how well they perform with respect to environmental impact, how socially conscious they are, and how well the company is governed. While these terms look to be somewhat subjective, several organizations around the world are attempting to standardize them, including the Sustainable Accounting Standards Board, the Global Reporting Initiative and CDP Worldwide.


Generally, the CFA Institute* does a good job of identifying the key elements of ESG as noted in the table below:




*cfainstitute.org/en/research/esg-investing


There are now a number of investment research organizations that provide ESG scores that may be ranked in the same way as profit growth, EPS, free cash flow, and other more traditional financial metrics when evaluating a stock or bond to purchase.


Impact Investing


Impact investing differs slightly from SRI and ESG in that the investment is generally made with a specific, measurable environmental or social benefit in mind, as well as an investment return. In the recent past, most impact investing was through institutional-level private partnerships or funds, but that is changing. There continues to be more and more structures for the retail investor to include in a well-diversified portfolio. A great source of information in this emerging area can be found at the Global Impact Investing Network site.


We hope this brief summary helped give you a baseline of knowledge around this space. Please contact us if you have further questions or want some help developing your ESG, SRI or impact investment strategy.


Contact the Peninsula Wealth Team to discuss your financial plan or to begin building a plan customized to your goals.






Office Address: 350 Townsend Street, Suite 411, San Francisco CA 94107 | P: 415-678-5360 | Email: team@peninsulawealth.com

 

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