Investing just does not means that it should return profits to the investors. It should have an impact on society and bring change at a larger aspect.
Socially Responsible Investing vs ESG
The difference between Socially Responsible Investing and ESG is Socially Responsible Investing depends upon how the individual chooses investments according to some guidelines, whereas ESG depends on the company’s background depending on more financial background. It also takes care of every social and environmental measure. Socially Responsible Investing uses ESG factors for taking a rough view of the investment.
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Socially Responsible Investing is an upgraded version of ESG. It eliminates the investments depending on the guidelines.
ESG stands for Environmental, Social, and Governance. A material impacts performance of the company. It clarifies performance growth by measuring environmental, social, and governance.
Comparison Table
| Parameter of Comparison | Socially Responsible Investing | ESG |
|---|---|---|
| Methods | Shareholder Activism | Positive Selection, Exclusion, Integration |
| Type of Investors | Public | Private |
| Risk Indication | No | Yes |
| Factors | No | Environmental, Social, Corporate |
| Process | Mutual funds | ESG factors |
| Example | Restrictive Screening | Toxic Water Disposal |
What is Socially Responsible Investing?
Socially Responsible Investing takes care of profits and good environmental background, which can lead to good changes in society. It is known by many more names.
It is a method to avoid risks for ESG risks. It also decides whether a company should be present in the investment portfolio. This market is growing rapidly in Europe and the US.
It needs constant socially conscious investing. This investment can be done through a mutual fund or can be through an exchange-traded fund.
Their motto is financial gain and social impact. It always not necessary that if a company is always giving profits will continue after you invest in it, but the financial background should be read before investing in a company.
Social value is a big aspect that adds a great impact to any investment in any company. Social value can fall anytime, which adds an unexpected risk that can occur anytime.
What is ESG?
ESG is Environmental, social and corporate governance. These are the major three factors that are used to measure the profit of the investment.
Returns are the biggest factor in an investment that matters to every concerned investor. Other various factors determine the return of the investment.
The various methods are activism, positive selection, engagement, consulting role, integration, and exclusion. Positive selection is made through either keeping criteria or looking for high performance. ESG compliant companies are prescribed more for inclusion.
Secondly, the other method is activism. This is a process where voting is done in a particular group of shareholders so that the majority can come up with a change in the strategy of the company.
Consulting role is also a method and most commonly referred to as quiet diplomacy. Shareholders and investors of big companies join together and discuss the risks of the company in daily meetings.
Main Differences Between Socially Responsible Investing and ESG
- Socially Responsible Investing is done through SRI mutual funds in the public market, but ESG is only in private markets.
- Restrictive screening is an example of SRI, but Toxic water disposal is an example of ESG.
- https://link.springer.com/article/10.1007/s10551-008-9956-0
- https://www.tandfonline.com/doi/abs/10.2469/faj.v74.n3.2
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Chara Yadav holds MBA in Finance. Her goal is to simplify finance-related topics. She has worked in finance for about 25 years. She has held multiple finance and banking classes for business schools and communities. Read more at her bio page.
