Alphabet soup: SRI, ESG and impact investing

Investors are increasingly looking for ways to invest responsibly and in a way that aligns with their values. What could have been a passing trend is clearly here to stay.

95% of the millennial population and 85% of the general population are interested in Sustainable Investing, according to Morgan Stanley’s 2019 Sustainable Signals Individual Investor Survey1. Coincidentally, Forbes predicts about $30 trillion in wealth transfer from Baby Boomers to Millennials over the next few years. Further, a report from Fidelity Charitable indicates that 44% of private investors said help from a financial advisor would encourage them to make an impact investment2.

Sustainable, responsible and impact investing assets have grown substantially, rising from $3 trillion in 2010 to $11.6 trillion in 2018 according to US SIF, a forum for Sustainable and Responsible Investment 3.

However, the opportunity comes with a lot of confusion, and our goal is to clarify some of that confusion, and create comfort in considering if this type of investing makes sense for you, your family, or your organization.

What do all these acronyms mean?

For starters, all of this can be categorized as values-based investing. Values based investing is aligning the objectives and holdings of your portfolio with their personal or organizational values. It is matching what you care about within your investment portfolio.

The problem for investors considering aligning their values with their portfolios, is the abundance of acronyms and buzzwords —SRI (Socially Responsible Investing), ESG (Environmental, Social, and Governance) and Impact Investing—that can make it difficult to navigate. Not to mention the lack of agreed upon definitions.

So what does all this mean?

Opportunities in publicly traded securities

Let’s start with SRI, which has become increasingly popular in the last few decades. The genesis of SRI can be traced back centuries to the founder of the Methodist movement, John Wesley, who wanted his followers to avoid investing with businesses that earned money through alcohol, tobacco, weapons or gambling —‘sin stocks ’ 4.

This in effect created the backbone of SRI investing—negative, or exclusionary, screening. Areas of exclusion grew through the 1960s to present day and has recently included divestments from fossil fuel producing companies and firearms manufacturers, among others. This area of values-based investing is the most simple. One does not feel comfortable with areas of a company’s business and therefore will not support them with capital.

The advantage of SRI investment options is that they can be among the least expensive in the space and are easy to understand.

With ESG investing, fund managers consider companies actively looking to either limit their negative impact or provide positive benefits to society.

Generally, ESG investing happens in the public equities and fixed income space, but has several nuances. First, the broadest form of ESG investing considers seemingly non-financial characteristics (those being the E, S and G acronym meanings) which are financially material to any company.

The Sustainability Accounting Standards Board (SASB) is an entity that seeks to “identify and communicate financially-material sustainability information to investors”. SASB defines financial materiality as “issues that are reasonably likely to impact the financial condition or operating performance of a company and are most important to investors”. Their goal is to standardize the way ESG is incorporated into investment decision making. IE: what ESG issues should companies prioritize based on sector and industry?

As an example, a technological company that can convert one of their data centers to use renewable energy will have cost benefits as well as a positive environmental effect. Companies with positive ESG attributes are proactively doing something to address environmental, social, or governance issues.

The limitations of publicly traded options Values-based investing has become increasingly easy to access, but does come with some inherent limitations due to their public nature. Namely, it is hard to make a clear linear connection between money invested in a broadly diversified mutual fund and impact outcomes. Additionally, companies still have the ultimate mandate of generating shareholder value through stock price appreciation. This can be at odds with doing the right thing from an ESG perspective.

For example, Microsoft is often included in many ESG funds but the company’s goal is to make software and other computer products, not necessarily generate positive social or environmental impact.

Private investments

Impact investing
In impact investing, there is clear intentionality on the part of the fund manager with the ability to draw a direct line between investor money and the values being prioritized.

This area is primarily invested in private funds. These vehicles have the advantage of being able to allocate capital into areas that are more difficult to access via public companies such as community development, poverty alleviation, or other areas that have not been addressed by traditional public financial markets. They also have more influence on the execution and management of these companies.

Investors in impact investing strive for a double bottom line, meaning they seek to generate competitive financial returns along with measurable societal or environmental impact.

This is the true differentiator of impact investing vs. SRI and ESG.

Source: United Nations Sustainable Development Goals

Private funds in the impact investing space will publish reports not only on financial performance, but also try to quantify their positive societal impact. Examples include numbers of schools built, measures of economic activity in a low-income community, or reduced carbon footprint by X units.

An important concept inherent to how investors should think about impact investing is the theory of change. That is, with an initial input, in this case money, there will be some activity, which will lead to some output, which should lead to some positive outcome.

This is also the best option for investors that want to look at their holdings and know exactly what their capital was used to support.

Source: Calvert Impact Capital, “Impact Investing – A Short Guide for Financial Advisors”

Implementing values-based investing

Ultimately, the goal of SRI, ESG or impact investing is to align personal, family or institutional values with the allocation of capital.

With the number of strategies available by which to accomplish this task, the usual risks should be considered across volatility, liquidity and income requirements. From there, the focus should be on answering the following question:

What values do you want to prioritize and reflect in your portfolio?

Coming full circle, the reason that values based investing is the most appropriate terminology for this subject is simple. Everyone has a different definition for what SRI or ESG means to them. Instead of fighting against the wide ranging interpretations of this subject, embrace the differences, and focus on what is most important to you.

The how

With a working definition or concept in hand, one can work with an advisor to craft a solution which best reflects the desired values, and balances the other needs outlined above in the portfolio as well. Given the broad platform of investment opportunities at SVB Private, a solution can be tailored that feels appropriate for each investor.

Take it slow

In the vast majority of cases, values-based investing is new. At the same time, there seems to be an inherent pressure to build an all-encompassing multi-asset class portfolio in one fell swoop. These two facts are at odds with each other.

For this reason, we recommend a patient approach. Take your time implementing your values into your portfolio. Start with the equity allocation and see how it goes for a year or two.

Do you like the experience, or are you struggling with a return stream that doesn’t closely track the index? Are you more engaged than in the past or have you lost interest in values alignment?


Embracing the varied definitions of SRI, ESG, and impact investments and building a portfolio that is truly customized can provide families and organizations comfort around how to align their goals with their beliefs. While the approach may not make sense for everyone, by going through the above outlined process with your advisor, one can certainly create a blueprint for such an undertaking.

Emmett Maguire, CFA

Emmett drives the research, approval, and ongoing due diligence process for all 3rd party investment managers for SVB Private. He works closely with a variety of partner investment management firms, client advisors, and the SVB investment team to make best in class solutions available to clients across asset classes and vehicle types.

Rob Fitzgerald, CAIA

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