BTL 748 - ESG, SRI and Impact Investment - Key Differences

 

The Banking Tutor’s Lessons

BTL 748                                                                          27-01-2025

ESG, SRI and Impact Investment - Key Differences

 

In previous issues I have explained all the three concepts - ESG, SRI and Impact Investment. In this Issue I am going to explain the Key Differences among the three types of Investments.

 

The terms ESG investing, SRI and impact investing are often used interchangeably, but there are subtle differences in their characteristics and objectives. While they share a common thread of considering nonfinancial factors in investment decisions, each approach has its unique focus and methodology.

 

All three of these approaches to investing home in on environmental and social factors.

 

Primary focus

 

ESG -  Considers ESG factors alongside financial analysis.

 

SRI – Aligns investments with personal values and ethical consideration.

 

Impact Investment – Intentionally seeks measurable positive social or environmental impact alongside financial returns.

 

Financial Objectives

 

ESG –  sets financial returns as the primary objective

SRI – seeks financial returns while avoiding unethical investments

 

Impact Investment – Targets a range of returns from below market to market rates.

 

ESG investing

 

Key benefit: Can help identify well-managed, sustainable companies with less long-term risks.

 

Risk: Companies with high ESG scores may still be involved in controversial industries.

 

SRI

 

Key benefit: Enables alignment of investments with your personal values.

 

Risk: Excluding entire industries may limit diversification and potential returns.

 

Impact Investing

 

Key benefit: Provides the opportunity to contribute to specific social or environmental causes.

 

Risk: It may involve lower liquidity or higher risk, especially in emerging markets.

 

Sekhar Pariti

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