S&P GLOBAL — 25 Feb, 2020

What is the difference

between ESG investing
and socially responsible
investing?
 

Theme ESG
Tags Global

HIGHLIGHTS

A lack of standardization in terminology has created confusion

over how ESG investing and sustainable investing differentiate,
and about which is the best action for investors to take.

Through ESG investing, market participants consider in their

decision-making the ways in which environmental, social, and
governance (ESG) risks and opportunities can have material
impacts on companies’ performance. Investors who use ESG in
their decision-making are able to invest sustainably while
maintaining the same level of financial returns as they would with
a standard investment approach.
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 Sustainable investing, sometimes known as socially responsible
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investing (SRI) or impact investing, puts a premium on positive
social change by considering both financial returns and moral
values in investments decisions. This strategy emphasizes
financial returns as a secondary consideration after the investors’
The Energy Transition – Born in the Dark
moral values have been accounted for in their decision-making.

As companies and Financiers,

investorsend-users pressto
continue forprioritize
ESG mine ratings as critical minerals
decision-making that
demand grows
benefits stakeholders alongside stockholders, environmental, social,
and governance (ESG) investing has emerged as a competitive
alternative to sustainable investing. However, a lack of standardization in
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terminology on the stories
has created shapingover
confusion our world
how the strategies differentiate
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and which is the best action for investors to take.

ESG refers to a broad range of

environmental, social and governance criteria on which companies are
measured. It reflects consumers' growing sensitivity to how companies
operate as factors in their buying decisions, and it is of increasing
interest to investors who are concerned about companies adopting
practices that will mitigate risk and ensure their long-term sustainability.
As a result, ESG issues are increasingly shaping
the way companies do business around the globe.

ESG investing offers a pragmatic approach to addressing financially

material issues through a broader information set. ESG-focused
investment products record returns on par with or better than those built
purely for risk-weighted performance, a trend that runs counter to the
notion that taking ESG into account detracts from performance.
Accounting for climate risks and environmental challenges,
investments in physical and human capital, and
good governance characteristics, among other factors, can greatly
improve companies; performance through an ESG-minded investment
strategy.

Since the term was first popularized in 2005, investors have increasingly
seen value in the idea of using ESG factors to guide investment
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decisions. The idea of ESG investing is an evolution of the trend toward
 socially responsible investing, but ESG provides a broader framework for
Sustainable bond issuance will return to growth in 2023
looking at social impact beyond simply excluding
companies associated with negative outcomes.

Comparatively, socially responsible investing allows market participants

The Energy Transition – Born in the Dark
to conduct positive and negative screens to invest in companies that
they believe are engaging in sustainable practices such as
environmental stewardship, consumer protection, human rights, and
racial and gender diversity. This strategy emphasizes financial returns as
Financiers, end-users press for ESG mine ratings as critical minerals
a secondary consideration
demand grows
after the investors' moral values. Socially
responsible investors actively avoid investing in companies or
organizations whose businesses run counter to their nonfinancial values
and ethical principles or those they perceive to have negative effects on
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society; including businesses across the alcohol, tobacco, fast food,
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gambling, weapons, fossil fuel, or defense industries.

Using ESG factors to steer investment decisions is now becoming much

more widely accepted. Globally, the most popular form of
sustainable investing strategy has come from negative and exclusionary
screens, through which investors elect not to invest in a specific
company based on their business line. That model has drawn some
criticism from ESG skeptics, who say it can detract from investors'
returns. And yet, the second-most popular form of sustainable
investment strategy is in ESG integration, which grew 69% from 2016 to
2018, largely thanks to growing interest in the model within the U.S.

As ESG investing has emerged as a competitive alternative to socially

responsible investing, investors are increasingly searching for forward-
looking metrics as a means of assessing portfolio risk beyond traditional
financial measures. S&P Global Ratings' ESG Risk Atlas provides a
comprehensive view of relative ESG risks facing various sectors and
geographies. The ESG Evaluation weighs potential ESG risks to
determine an entity's capacity to operate successfully, and along with a
preparedness assessment of a company's capacity to anticipate and
adapt to a variety of long-term disruptions, determines the company's
final ESG score. S&P Global's additional ESG solutions provide
comprehensive company-level ESG metrics, vital data, market

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 benchmarks, and analytical tools and standards to help customers
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create resilient strategies to maximize financial performance, build a
sustainable future, and meet the expectations of an evolving market.

Because ESG investing considers an organization's environmental,

The Energy Transition – Born in the Dark
social, and governance risks and opportunities that could have material
impact on its performance, these factors are used to comprehensively
expand upon and enhance the traditional
measurements of company performance in informing investors
Financiers, end-users press for ESG mine ratings as critical minerals
decision-making.demand grows

While socially responsible investing and ESG investing both are a

testament to the various ways sustainable practices can be incorporated
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into insights on theand
decision-making stories shaping ourstrategy,
investment world ESG investing has proven
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to be the contemporary and exemplary choice. Those who take the ESG
route are equipped with metrics that quantify financial risk and
opportunity, while socially responsible investors engage in decision-
making primarily on principle. To facilitate long-term, sustainable
growth, it is imperative to analyze companies' ESG performance and
examine how activity in the markets influences the world in which we
live.

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