Unpacking the ESG Alphabet Soup

ESG, SRI, impact investing — all of these are terms used by reporters and experts (including FWIW) to describe investment strategies that don’t just consider returns in a social and environmental vacuum.

Are these terms interchangeable? The distinctions between them are nuanced, but important to investors when it comes to putting together an investment strategy. We break them down in our glossary. But for a quick primer, read on …

Environmental, social, and governance (ESG) investing and socially responsible investing (SRI) use rankings for individual companies, mutual funds, and ETFs to decide where they want to invest—a decision that comes down to risk tolerance. You can decide not to invest in companies below a certain ranking on ESG factors and prioritize those above it. Based on how well (or not) something scores, investors get rid of the bad stuff and prioritize the good stuff, while still keeping an eye on returns. It’s all relative!

Impact investing is a little different. These investors actively seek out investment opportunities that they believe will generate returns and a positive impact — and then they go out and measure that impact to see if they’re right.

Sustainable investing does not necessarily have the same measurement standards, but it’s similar in that these investors are not just seeking out companies with a certain “E” score in ESG: they’re looking for clean, green opportunities, often in private markets.

As strategies, ESG investing and impact investing are not mutually exclusive. A lot of investment strategies incorporate both. Gender lens investing is a good example of this overlap. A gender lens investor might screen out companies with low ESG scores on gender diversity, and also seek out investments in companies that are women-led or otherwise better for women.

Links to other past FWIW issues where you can learn more:

• Avoiding the "bad" stuff
• The invisible heart of the markets
• With great (financial) power, comes great ...
  

Videos clips from CEO Jean Case for additional insight:

• Let’s start at the beginning — What is ESG?
• Why do investors consider incorporating ESG in their portfolios? — The growing importance of ESG