Historically, many investors have added a “values” overlay to their investment preferences. The two primary values-based approaches are Socially Responsible Investing (SRI) and Impact Investing (IR). To these has been added a new acronym, ESG (Environmental, Social, and Governance). While these terms are frequently used interchangeably, it is important to understand some critical differences to see why ESG is so problematic.
In this country, churches were the earliest adopters of SRI. Through SRI’s “negative screening” approach, investments are identified and avoided in objectionable industries such as tobacco, firearms, and gambling.
Rather than avoiding certain investments, IR’s strategy is to invest in companies with potential solutions to problems important to an investor. For example, an impact investor interested in fighting cancer would invest in companies working on cancer