More and more investors are looking for “double bottom line returns” that meet financial goals and advance their personal values where people and the planet are concerned. Socially responsible investing and impact investing are both mission-driven investment strategies, but there are significant differences – semantic and practical – between the two approaches.
Also known as sustainable, ethical, or values-based investing, socially responsible investing (SRI) describes investment strategies that integrate social and environmental factors into decision-making. SRI avoids putting money into companies with a negative impact on society or the environment.
Yes, SRI investors and fund managers purposefully avoid investments that run counter to their values. Using “negative screens” when analysing opportunities means they exclude firms or industries with adverse effects on the world – alcohol, tobacco, firearms and gambling companies, for example. Steering clear of those sectors is considered a “do no harm” approach.
Similar to SRI, impact investing also takes social and environmental effects into consideration. However, the difference is that impact investments are only made in companies, organisations or funds where the main purpose is to achieve positive impacts, alongside a financial return. The industry has exceeded $500bn in investments to date.
Indeed, impact investing goes beyond simply avoiding investments that could cause harm to people and the planet. Impact investors actively want their money to promote a positive social and/or environmental return. For example, they choose companies that have a positive impact on community development, or produce technologies that can lower greenhouse gas emissions.
Socially responsible investing avoids harmful sectors and firms. However, the goal is still to maximise financial returns. SRI investment managers are legally obligated – with a fiduciary duty – to make decisions that create the highest rates of return. So their clients want to turn a profit in an ethical way.
Expectations for financial returns vary widely with impact investors. Some are looking for market-rate returns, but others may be content with below-market-rate returns because their investments are maximising positive impacts. Either way, doing good and generating a profit are not mutually exclusive.
Impact investments are assessed with metrics that can gauge how well a company’s operations and strategy are in line with environmental, social and governance (ESG) objectives. The analysis probes the effects on a firm’s market and community. In the SRI space, positive impacts can boost long-term value while minimising reputational risks.
The Global Impact Investing Network (GIIN) is a New York-based nonprofit organisation that strives to increase the scale and effectiveness of impact investing around the world. The group works with investors to allocate capital to solve some of the most intractable challenges, as highlighted by the United Nations’s Sustainable Development Goals. The GIIN also developed the IRIS performance metrics for measuring impact.
IRIS is one set of impact metrics to facilitate transparency and credibility of reporting. It applies to diverse economic sectors, helping investors compare and benchmark non-financial impact. The standardised system tracks a range of data, from metric tonnes of greenhouse gas offset to average employee wages. IRIS+ is the newest version for managing and optimising impact. Although there are several well-known ratings tools, none is universally accepted.
The UN-backed organisation Principles for Responsible Investment (PRI) runs a network of investors promoting six key maxims about ESG values. Signatories represent $80 trillion in assets under management. PRI includes a broader range of investments than SRI, since this “responsible” paradigm does not categorically rule out any companies or sectors with a negative screen or divestment. Investors simply include ESG information – along with all other relevant factors – when assessing risk and return.