The following is my opinion of the differences between ESG (Environment, Social, Governance) and SRI (Socially Responsible Investing). And the benefit of ESG:
1. SRI is a negative screen. For example, an investor does not want to invest in tobacco companies, gambling companies, companies that make or sell guns and or other areas.
2. ESG is a positive screen. Investors want to ensure the companies they invest in are good corporate citizens and have good practices towards the environment, the people they deal with (for example good human resources practices – social) and governance. ESG applies to all industries, all countries and all sizes of firms.
3. Good investment managers have always cared about ESG as they strive to invest in good companies. The labelling of ESG makes it easier for everyone to discuss.
4. SRI was popular 10-20 years ago and ESG has become popular over the last 10 years. Some people believe they are the same however I believe they are different as stated above.
5. Twenty years ago, and today, the banks are examples of how complicated SRI investing is. Banks are good for our economy as they facilitate the function of lending and holding deposits for all industries – including tobacco companies for example.
6. People like to quantify and rank everything – it makes it easier for us to think about. Therefore, that are now ESG ratings that several financial firms offer. I recommend that these ratings are good tools for all investment managers to use however they need to do their own work to establish their own ESG ratings. Just like bond managers cannot rely on bond ratings and must do their own analysis on the strength of the bond internally.
7. In finding the right investment managers for you, make sure that the manager does well financially and has its own human resource stability. Then look at the manager’s practices with respect to the consideration of ESG in their analysis and ensure its inline with your beliefs.
8. Learn what information managers use to incorporate ESG into their investing and look out and avoid those firms that include ESG in their marketing pitch yet do not really use it.
9. As a final note, some investors do not care about ESG investing. However I do believe it is becoming more prominent and can impact the valuations of publically traded companies. The following article was shared on LinkedIn regarding an article in Barrons. Although it focuses on one ESG topic, it demonstrates the financial value of good ESG practices. Enjoy!
Search Sexual Harassment is becoming a serious investment risk on Barrons.
I cannot share the link here as it goes to setting up a subscription with Barrons. However you can seacrh the title and read the article.