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 society including businesses across the alcohol, tobacco, fast food, gambling, weapons, fossil fuel, or defense industries. This strategy emphasizes financial returns as a secondary consideration after the investors' moral values. The idea of ESG investing is an evolution of the trend toward socially responsible investing, but ESG provides a broader framework for looking at social impact beyond simply excluding companies associated with negative outcomes.Ĭomparatively, socially responsible investing allows market participants 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. Since the term was first popularized in 2005, investors have increasingly seen value in the idea of using ESG factors to guide investment decisions. 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. 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. As a result, ESG issues are increasingly shaping the way companies do business around the globe.ĮSG investing offers a pragmatic approach to addressing financially material issues through a broader information set. 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. However, a lack of standardization in terminology has created confusion over how the strategies differentiate and which is the best action for investors to take.ĮSG refers to a broad range of environmental, social and governance criteria on which companies are measured. As companies and investors continue to prioritize decision-making that benefits stakeholders alongside stockholders, environmental, social, and governance (ESG) investing has emerged as a competitive alternative to sustainable investing.
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