SRI, ESG, Impact Investing: How to sort through the confusing world of sustainable Finance

When I was first getting into the field of sustainable finance, I had no idea how many terms I would have to learn: ESG, carbon credits, Social Responsible Investing….the list just goes on.  

If you are like me, and most investors today, you are increasingly aware of how your investments are either helping or harming our world. In fact, according to The Forum for Sustainable and Responsible Investment, sustainable investing has increased by 42% in just two years and, in the U.S. alone, there is currently $17.1 trillion in assets under management using an impact or sustainable investing strategy.

With the vast number of assets flowing into this field, it’s crucial that investors zero in on their impact goals and understand the different strategies related to sustainable investing. In this article, I will teach you about three different approaches.

Without further ado, here they are:

Environmental, Social, and Corporate Governance (ESG)

ESG is the practice of rating public companies based on their impact to society, this includes how sustainable the company is (E), their philanthropic efforts (S), and their internal practices/governance (G).

Today, ESG is treated like a risk assessment. If a company performs poorly in any one of these areas, it’s a red flag for investors generally speaking.

If you are interested in seeing how a company you invest in stacks up in terms of its ESG practices, check out Sustainalytics. They help rate and analyze public companies.

Impact Investing

Impact Investing only relates to private funds and, while the strategy requires some sort of financial return, it prioritizes impact. This means to be an impact investment, it needs to benefit the greater good - for example, providing quality education to children who would otherwise not be able to afford it.

Impact Investing goals are very different for each company. One company might prioritize sustainability, while another might be focused on broadening financial literacy.

Socially Responsible Investing (SRI)

This type of investing actively screens out companies that are ethically questionable, including those that produce alcohol, tobacco, and other addictive substances, fossil fuels producers, and human rights violators.

In Summary.

Investing is deeply personal, and dependent on your specific goals and strategies. Learning about the investing approaches related to sustainable finance is the first step, the second is to determine which suits you and how you want to align your values to your portfolio.

If you are interested in learning more about the field of sustainable finance, check out the Global Impact Investing Network (GIIN for short). It is a great resource in understanding the industry and some of the major players in impact investing.