One of the biggest generational divides between younger and older people is over how important they consider the issue of corporate social responsibility to be. Younger demographics like millennials tend to be particularly concerned with whether companies are taking matters such as climate change and diversity seriously.
They are more likely to decide whether to do business with or invest in a company based on its track record in these areas. Therefore, it is something that companies also take seriously in 2023. Two common ways of doing so are ESG investing and socially responsible investing, but it is important to understand how they differ, as they are often regarded as being essentially the same thing.
What is ESG investing?
The acronym ‘ESG’ stands for environmental, social and governance. It is a set of criteria that can be used to determine how ethical a particular investment opportunity is. These criteria measure the way that companies act in areas like the environment and employee rights. With growing numbers concerned about such matters, adopting ethical practices can make businesses more profitable and attractive to potential investors and ESG criteria helps to identify them to investors.
A lot of financial advisors will offer ESG investment support. That is in recognition of its increasing prevalence within the corporate world. The terms ‘environmental’, ‘social’ and ‘governance’ can be a little vague for most people though, so let us look more closely at what each of them means.
• Environmental
This refers to issues related to the environment and climate change. An independent financial advisor in Chester or another part of the country would research the track record of a company when it comes to helping to conserve natural resources, mitigate climate change, reduce air pollution and cut their energy consumption.
• Social
This part means key issues such as diversity, working conditions for employees, how much a company does to support local communities and its record when it comes to human rights. ESG investing means looking for companies that score well in all of those areas.
• Governance
This part covers areas such as how much those in executive positions within a company are paid, how independent its board of directors are and its record when it comes to public transparency.
Companies are more aware of these issues in 2023 than ever before and ESG investing is a factor in their decision-making. Therefore there are a lot of companies that it will be possible to invest in without compromising much on that.
What is socially responsible investing?
Socially responsible investing – or SRI – clearly has some crossover with ESG investing. Again, it is about looking at the ethics of a particular company before investing in it, but it represents a more radical step. A financial advisor who is looking at ESG investing on behalf of a client will research the performance of potential investment opportunities across the environmental, social and governance metrics as well as more standard ones like the probable financial return on the investment.
Socially responsible investing takes the commitment to social causes a stage further by actively seeking out only investments that support those causes. Often an investor will have a particular social cause that is of paramount importance to them. Therefore an advisor or wealth manager will be charged with finding out where companies stand on that issue and actively screening out those that do not match up with its values.
That issue could be anything from climate change to employee rights – or there may be more than one issue that the client sees as a decisive factor when choosing investments.
What are the key differences between ESG and SRI investing?
The primary difference between the two approaches is that ESG is a complement to traditional investment considerations such as the potential returns, whereas SRI is an entirely new approach. A financial advisor who has been hired to research ESG investments will also factor in what the profit on an investment stands to be when delivering their report to the client. It will be a matter of weighing up these different concerns when deciding whether to invest or not.
Advisors looking for SRI will prioritise the social responsibility of the company in question over the profit to be made. That can mean rejecting potentially lucrative investment opportunities on the grounds of ethics while opting for ones that will be less profitable for the client. Socially responsible investing often means opportunities within whole fields – such as weapons manufacture, tobacco or gambling – are completely avoided when seeking potential investments for the client.
Therefore the big difference is that ESG investing still incorporates the profit motive alongside ethical considerations, whereas with SRI, the latter is the main point.
A financial advisor or wealth manager based near you can help you to pursue either of these strategies for investing your money.