While great strides have been made in sustainable investing, we still see the marketplace struggling with the concept that environmental, social, and governance (ESG) is different from socially responsible investing (SRI). We developed a paper clarifying some common misperceptions and the differences between ESG, SRI, and Impact investing a while back, and it still holds true. (Simplifying Sustainable Investing: The Difference Between ESG, SRI, and Impact)
There is little question that utilizing environmental, social, and governance (ESG) analysis and integration is simply smart investing. According to a recent report from Ernst & Young, 97 percent of institutional investors use ESG analysis in investment decision making. These are organizations that have a duty to maximize long-term returns.
This is not to say that SRI and Impact do not have their place or make sense for a certain demographic, because they do. Practitioners and proponents have done and continue to do amazing work. But the strategy itself prioritizes “doing good” over profits, thus arguably, making it not a viable option for the masses.
When Swell Investing, the socially conscious online investing platform, announced this summer that it will close its doors, many proponents of SRI attempted to manage the potential fall-out. In their rush, they commonly conflated SRI with ESG. This consistent misstep confuses the marketplace and ironically could lead to fewer investments made in support of a sustainable world. That’s because it clouds the fact that Swell’s collapse had nothing to do with ESG. Beyond what appear to be some strategic missteps, the platform failed because it could not reach scale. There are simply not enough people and assets to make its investment approach and model viable.
Consider that on paper, I am Swell’s ideal target client:
I am a thirty-something that has made sustainability (specifically environmental sustainability) a focus of my life. I grew up passionate about protecting the environment, recycling, conserving water – heck, I even chose to go to a school with a core mission in support of conservation and sustainability.
I have worked with one of the largest U.S. financial institutions, a “Big 4” accounting firm, and a Fortune 12 telecommunications company on everything from publicizing a green bond initiative, to consulting on energy, water, and supply chain management, to supporting clean energy investment opportunities. I have developed annual sustainability reports following the Global Reporting Initiative (GRI) framework and provided support services related to Dow Jones Sustainable Index (DJSI) listings, climate change (carbon emissions), water use and intensity, and supply chain management for third-party organizations such as CDP (formerly Carbon Disclosure Project).
Here’s the kicker, though:
I would not invest with Swell or in any strictly SRI product or strategy. Why? Because my investment goal is to make money and ensure financial stability first. SRI is mostly about making a statement with your money – or dare I say “protesting” with it in some cases by voting proxies and divesting from certain companies or industries. On the other side of the same coin, one example of an equity portfolio would potentially be comprised of some blue-chip companies and relatively new technologies or “green” innovations. These can carry significant volatility and a lack of balance between risk and reward, which is simply something that I can’t afford. And I would venture to say that I’m not alone in that regard, considering 40 percent of Americans can’t cover an emergency expense of $400 according to the Board of Governors of the Federal Reserve System.
Unlike SRI, ESG on its own is not about changing the world, although that is a massive potential bonus. It’s about proper risk management, efficiency, maximizing value, and sound investing. When applied properly, it can lead to a more sustainable world. After all, a rising tide lifts all boats. Will ESG bring about the necessary changes needed quickly enough? The jury is still out, but it’s a solid compromise – something that we all could use more of in this current political environment.
While we at Longview Strategies are experts in marketing for financial services, we are not financial professionals. Our work is to help individuals, companies, and industries clearly communicate what it is they do as well as how and why they do it. Whether you choose to work with us or another marketing and communications provider, you need to get to know your audience, understand what motivates them, and use all of the available means at your disposal to gain a winning competitive edge. Start by staying consistent in the use of relevant terms: ESG is ESG, and SRI is SRI. When the two terms are fused together, the sustainable investing conversation hinders us all from reaching our collective goal – creating a more sustainable, prosperous, and just world.
