SRI vs. ESG: What's the Difference? - SmartAsset (2024)

SRI vs. ESG: What's the Difference? - SmartAsset (1)

Socially Responsible Investing and Environmental, Social and Governance Investing have both risen in popularity among socially conscious investors. Learn the basics of each, how they differ and which option is best for your investment strategy. To find the right investment strategy for your situation, consider talking to a financial advisor.

The Basics of SRI and ESG

Socially Responsible Investing (SRI) is a type of investing that keeps in mind the environmental and social effects of investments and strives to make positive impacts in both areas. SRI investing is also known as green or ethical investing. There’s also a category of SRI investing called impact investing, which focuses on making positive social impacts via investing. SRI investing is a more active method in that investors can opt out of certain investment opportunities based on whether a company meets these standards.

Investors can take part in SRI investing by buying stocks in individual companies with socially or environmentally responsible missions or practices. They can also invest in a wider swath of SRI-friendly companies via an SRI-focused ETF.

Environmental, Social and Governance Investing (ESG) refers to investing in companies that fit within the ESG framework. More specifically, investors in this discipline consider how environmental, social and corporate governance impact how well an investment does in the market. Most specifically, this type of investing considers how these three factors affect the performance of an investment and, therefore, an investor’s returns.

While there are some notable differences between the two types of investing, they are closely related. For example, the Forum for Sustainable and Responsible Investment notes that “[s]ustainable, responsible and impact investing (SRI) is an investment discipline that considers environmental, social and corporate governance (ESG) criteria to generate long-term competitive financial returns and positive societal impact.”

SRI vs. ESG

It’s no surprise that SRI and ESG are often confused. After all, both methods consider the wider social and environmental implications of an investment. But there are some important distinctions between the two.

Sure, ESG investing focuses on many of the same factors as SRI investing, such as the environmental and social impacts of a particular investment. But ESG investing also considers how a company’s adherence – or lack thereof – to these standards might affect its performance on the market.

Alternately, SRI investing, while it considers the environmental and social impacts of investments, also refers to the practice of actively not investing in certain companies, ETFs or mutual funds because they don’t meet one’s standards for socially responsible investing.

For example, if an investor feels strongly about the adverse effects of a specific industry on the environment, they might avoid investing in companies that don’t adhere to environmentally friendly manufacturing processes. This is an example of SRI investing.

As such, the main distinction between the two types of investing is that one focuses on how environmental, social and governance factors affect the performance of a particular investment (ESG investing) while the other refers to not taking advantage of an investment opportunity based on a similar framework (SRI investing).

Choosing the Best Option

Now that you know the difference between the two types of ethically, socially responsible or “green” investing, it’s time to choose the best option for you and your investment portfolio.

Broadly speaking, if you are a supporter of socially and environmentally friendly investment practices but are more concerned with how they affect your bottom line, ESG investing is probably the better choice for you. That’s because this type of investing considers how environmental, social and corporate governance factors affect an investment’s return.

If you’re more of an activist and don’t mind forgoing a specific investment because it doesn’t fit with your beliefs, then SRI might be a better choice for you. Remember, this type of investing means that an investor may not invest in certain companies, ETFs or mutual funds because they don’t line up with one’s beliefs for socially or environmentally friendly investing. This could also result in potentially lower returns.

The Bottom Line

SRI is a type of investing that keeps in mind the environmental and social effects of investments, while ESG focuses on how environmental, social and corporate governance factors impact an investment’s market performance. Though similar, the two have some major differences. ESG investing considers how a company’s adherence – or lack thereof – to certain standards might affect its performance on the market, while SRI investing can include the practice of actively not investing in certain companies or funds because they don’t meet certain standards.

If you’re more concerned with how the environmental and social impacts of an investment will affect returns, then ESG investing might be the best choice. However, if you’re OK with forgoing potential returns if an investment doesn’t meet your standards for a socially or environmentally conscious investment, SRI investing may be a better option.

Tips for Investing

  • Consider talking to a financial advisor about both SRI and ESG investing to see how it could impact your portfolio. Finding a financial advisor doesn’t have to be hard.SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals,get started now.
  • Investing isn’t always easy, especially when you want to maximize your earnings but don’t quite know how. In that case, it could make sense to sign up with a robo-advisor. Thebest robo-advisorsmanage your investments according to your preferences and finances with a focus on getting you the best returns. Plus, it’s online, which makes it convenient for those on the go.

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SRI vs. ESG: What's the Difference? - SmartAsset (2024)

FAQs

How is SRI different from ESG? ›

SRI is a type of investing that keeps in mind the environmental and social effects of investments, while ESG focuses on how environmental, social and corporate governance factors impact an investment's market performance.

Do SRI funds outperform the market? ›

In this article, we use a meta-analysis to examine the performance of socially responsible investing (SRI). We find that, on average, SRI neither outperforms nor underperforms the market portfolio. However, in line with modern portfolio theory, we find that global SRI portfolios outperform regional subportfolios.

What does SRI stand for in ESG? ›

Environmental, social, and governance (ESG), socially responsible investing (SRI), and impact investing are industry terms often used interchangeably by clients and professionals alike, under the assumption that they all describe the same approach.

Does ESG make a difference? ›

Among other advantages, executing ESG effectively can help combat rising operating expenses (such as raw-material costs and the true cost of water or carbon), which McKinsey research has found can affect operating profits by as much as 60 percent.

What is the relationship between SRI and ESG? ›

SRI versus ESG

The most common types of sustainable investing are socially responsible investing (SRI), which excludes companies based on certain criteria, and ESG, a more broad-based approach focused on protecting a portfolio from operational or reputational risk.

What is the main difference between CSR and ESG? ›

CSR focuses on corporate volunteering, lowering carbon footprint, and engaging with charities. ESG provides a more quantitative measure of sustainability. ESG considers environmental, social, and governance factors. ESG improves the valuation of the business.

Does SRI hurt investment returns? ›

The main finding from this body of work is that socially responsible investing does not result in lower investment returns.

Why does Warren Buffett like index funds? ›

Buffett's thinking here is straightforward. Most non-professional investors (and even many professional stock-pickers) have very little chance of outperforming the market. But index fund investors get exposure to the entire U.S. market and can benefit from its historical upward trajectory — and for cheap.

Why don t the rich invest in index funds? ›

Wealthy investors can afford investments that average investors can't. These investments offer higher returns than indexes do because there is more risk involved. Wealthy investors can absorb the high risk that comes with high returns.

Are SRI's good investments? ›

Several other studies have shown that SRI mutual funds can not only match traditional mutual funds in performance, but they can sometimes perform better. There is also evidence that SRI funds may be less volatile than traditional funds.

What is better than ESG? ›

Whether you choose impact investing or ESG depends on your values, goals, and risk appetite. Some people prefer the integrative, corporate approach of ESG investing, while others prefer the freer, more self-led style of socially responsible impact investing.

What is an example of SRI? ›

One example of socially responsible investing is community investing, which goes directly toward organizations that both have a track record of social responsibility through helping the community, and have been unable to garner funds from other sources such as banks and financial institutions.

What are the disadvantages of ESG? ›

One of the main disadvantages of ESG criteria is that companies are not required to disclose all information related to their sustainability practices. This can make it difficult for investors to evaluate the sustainability and ethical impact of investments.

What are the downsides of ESG? ›

However, there are also some cons to ESG investing. First, ESG funds may carry higher-than-average expense ratios. This is because ESG investing requires more research and due diligence, which can be costly. Second, ESG investing can be subjective.

Why is ESG criticized? ›

Some supporters think the term has become so broad as to lose much of its meaning. Many point to the prevalence of greenwashing, which is when companies exaggerate the environmental benefits of their actions. Other criticisms focus on the way fund managers rank companies by how they're performing on ESG factors.

Is ESG an SRI? ›

While ESG investing focuses on integrating a company's environmental, social, and governance factors into investment decisions, SRI goes beyond by aligning investments with specific values or ethical criteria. Both strategies have demonstrated the potential for financial gains while positively impacting the world.

What is the difference between SRI and CSR? ›

What are the differences between SRI and CSR? Socially responsible investing (SRI) is a type of investing that excludes companies failing to behave in a socially responsible manner. Corporate social responsibility (CSR) is a model that businesses can follow to ensure they are operating in a socially responsible manner.

What is SRI in sustainability? ›

Socially responsible investing (SRI) is an investing strategy that aims to generate both social change and financial returns for an investor. Socially responsible investments can include companies making a positive sustainable or social impact, such as a solar energy company, and exclude those making a negative impact.

What does SRI mean in sustainability? ›

Socially responsible investments—known as conscious capitalism—include eschewing investments in companies that produce or sell addictive substances or activities (like alcohol, gambling, and tobacco) in favor of seeking out companies that are engaged in social justice, environmental sustainability, and alternative ...

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