Sustainability, governance, emissions, ESG, impact investing, SRI; socially conscious funds come under a wide umbrella of labels, but they don’t always equate to the same things. Here’s a breakdown for advisors of the three main strategies for investing with sustainability in mind.
ESG and What It Means
Environmental, social, and governance (ESG) funds are some of the broadest ways to invest within the category and can have a variety of goals and strategies. ESG funds focus on the environmental, social, or governance practices of the invested-in company itself and take into account a variety of risks, but the goal always remains focused on the financials.
Investing in ESG can look like finding funds that focus on reduced carbon footprints of companies or funds that focus on gender diversity within companies, for example. It’s a broad category with a lot of iterations, but it always comes back to how these factors affect company performance.
In the U.S., there’s no wrong way to go about ESG, simply because there aren’t standards or regulations within the space. This can definitely add to the confusion of investing sustainably, but regulation looks to be on the way possibly this year; in the meantime, it means that advisors and investors really need to do their own homework of looking under the hood of ESG funds before they invest to ensure that they are following the desired strategy and don’t have any undesired or surprise exposures.
SRI and How It Differs From ESG
Socially Responsible Investing leans more into the idea of investing ethically, whether the focus is of a political nature or simply an individual’s own values. While SRI also covers a broad range of investing types, these funds invest with a specific goal in mind and will either intentionally include or exclude companies based on the goal.
Some funds take the exclusionary route, seeking to avoid exposures to specific targets, whether they are fossil fuel reserves or entire countries. On the flip side, other funds opt in and might only include companies that are actively working to combat climate change or working for human rights, as an example. Exclusionary funds tend to be more noticeable, but all SRI funds utilize an ESG lens in their approach.
Impact Investing
Impact investing is perhaps the most direct approach of all of the ESG umbrella funds and means that the fund seeks very specific, positive outcomes from its investments. By investing in a company, the fund seeks to fulfill specific goals that have larger benefits not tied to financials; these are generally things that improve quality of life or the environment in some fashion.
For investors engaging in impact investing, positive financial outcomes are nice, but the ultimate goal is positive change, even if it comes at the expense of returns.
State Street Global Advisors offers a variety of ESG funds with different investment strategies and plans, including the SPDR SSGA Gender Diversity Index ETF (SHE), the SPDR S&P Kensho Clean Power ETF (CNRG), and the SPDR S&P 500 Fossil Fuel Reserves Free ETF (SPYX), among others.
For more news, information, and strategy, visit the ESG Channel.