Values-based investing is no longer just a niche strategy; it’s become a key consideration for many investors. According to US SIF, assets in socially responsible investing (SRI), environmental, social, and corporate governance (ESG) investing, and impact investing grew from $3 trillion in 2010 to $12 trillion in 2018. But with so many values-based investment options, how do you decide which approach aligns with your financial and personal goals? Here’s a breakdown of SRI, ESG, and Impact Investing to help you make an informed decision.

Socially Responsible Investing (SRI)

What It Is
Socially Responsible Investing, or SRI, is about excluding certain investments that conflict with an investor’s moral or ethical values. Historically, this approach dates back to the 18th century when John Wesley, founder of Methodism, advised against investments in businesses like alcohol, tobacco, and gambling. In today’s context, SRI still screens out "sin stocks" but has expanded to exclude companies involved in fossil fuels, firearms, and other industries seen as socially harmful.

How It Works
SRI is largely a process of exclusion. Investors remove industries or companies that don’t align with their values, making it one of the more straightforward (and often cost-effective) approaches to values-based investing. It’s not typically focused on companies making proactive societal improvements but rather avoids those causing harm.

Who It’s For
SRI is ideal for investors who want an uncomplicated approach to reflect their values by avoiding specific industries or practices.

Environmental, Social, and Governance (ESG) Investing

What It Is
ESG investing evaluates companies based on their environmental, social, and governance practices. Rather than just avoiding negative impacts, ESG looks to invest in companies actively working to improve or benefit society and the environment. This approach might include selecting a technology company that converts data centers to renewable energy or a business with fair labor practices.

How It Works
ESG investing uses a scoring system, with companies rated on criteria relevant to their sector. The Sustainability Accounting Standards Board (SASB) has made efforts to standardize ESG reporting to better inform investors on which ESG issues companies prioritize. This is especially useful for investors who want to reward positive behaviors. For example, an energy-efficient technology company might score high in ESG for reducing emissions while maintaining profitability.

Who It’s For
ESG investing is a good option for investors who want to support companies with sustainable and socially responsible practices but still prioritize financial returns. It allows for a nuanced approach to ethical investing by rewarding positive practices rather than simply excluding certain sectors.

Impact Investing

What It Is
Impact investing takes values-based investing to the next level by directly linking investments to measurable positive outcomes. Unlike SRI and ESG, which often focus on publicly traded assets, impact investing is largely focused on private markets. Investors in this category seek both financial returns and tangible, measurable impact, like reducing carbon emissions or supporting underserved communities.

How It Works
Impact investments often target private funds that address issues not commonly covered in public financial markets, such as community development or poverty alleviation. These funds focus on specific societal goals, like building schools, improving local economies, or reducing carbon footprints, and aim to quantify the societal or environmental impact of each investment.

Who It’s For
Impact investing appeals to those who want a direct, quantifiable link between their capital and a cause, such as education or renewable energy. Because it operates mostly in private markets, it’s also suited for investors who are comfortable with the illiquidity of private funds and are focused on tangible social benefits alongside financial returns.

Key Differences and Considerations

1. Accessibility
   • SRI and ESG investments are typically available through public markets and are easier to access through traditional mutual funds or ETFs.
   • Impact investing largely involves private funds, which are less accessible and often require a higher level of commitment.
2. Investment Goals
   • SRI focuses on excluding companies that conflict with an investor’s values.
   • ESG looks for companies actively practicing positive social or environmental behaviors.
   • Impact investing aims for measurable societal benefits, often in private markets.
3. Direct Impact
   • Impact investing provides a more direct, quantifiable impact on specific causes, making it ideal for those wanting transparency in where their funds go. Conversely, determining the exact impact of capital in broadly diversified SRI or ESG funds can be more challenging due to the structure of public markets.
4. Company Focus vs. Societal Outcome
   • ESG and SRI focus on company behaviors within existing public market structures, where profits remain a priority. Meanwhile, impact investing may place equal importance on social outcomes, even if those don’t directly impact stock price.

Which Option Fits Your Goals?

Values-based investing is personal, and choosing among SRI, ESG, and impact investing will depend on your priorities. Here are a few questions to consider:

• Do you want to avoid certain industries entirely? If yes, SRI might be a good choice.
• Are you interested in supporting companies with responsible practices but still want competitive returns? ESG allows for both.
• Are you looking to make a measurable social impact? Impact investing is likely the best fit.

Each of these approaches provides different avenues to align investments with personal values, so you can choose one—or combine elements of all three—to build a portfolio that reflects your priorities. As values-based investing grows, so does the ability for investors to customize their portfolios to meet both financial and ethical goals.