--- title: "ESG vs SRI vs Impact Investing: What's the Difference?" description: Compare ESG investing, socially responsible investing and impact investing, including objectives, methods, portfolio trade-offs, measurement and risk. image: https://aicontentfy-customer-images.s3.eu-central-1.amazonaws.com/02cf1270-9b08-40d5-bd76-f82eac0b0c10.png --- [Skip to main content](https://blog.palance.co/understanding-esg-investing-a-simple-guide#main) [![palance\_primarylockup\_reverse](https://blog.palance.co/hs-fs/hubfs/palance_primarylockup_reverse.png?width=150&height=50&name=palance_primarylockup_reverse.png) ![palance\_primarylockup\_reverse](https://blog.palance.co/hubfs/palance_primarylockup_reverse.svg)](https://www.palance.co) Open main navigation Close main navigation - Search - [Get Started](https://palance.co/) [Blogs](https://blog.palance.co) [Get Started](https://palance.co/) [Blogs](https://blog.palance.co) Search # ESG vs SRI vs Impact Investing: What's the Difference? # ESG vs SRI vs Impact Investing: What's the Difference? ![Palance](https://blog.palance.co/hs-fs/hubfs/palance_icononly.png?width=50&height=50&name=palance_icononly.png) by [Palance](https://blog.palance.co/author/palance) Mar 10, 2024, 6:15:54 PM ESG investing, socially responsible investing (SRI) and impact investing are often grouped together, but they answer different questions. ESG typically incorporates environmental, social and governance information into investment analysis. SRI often starts with explicit values or exclusions. Impact investing goes further by seeking measurable social or environmental outcomes alongside a financial return. ## Why the Distinction Matters The labels used by funds and investors can sound similar while describing very different portfolios. An investor who wants to avoid certain activities, for example, needs a different process from an investor who wants to identify financially material ESG risks or deliberately finance projects intended to create measurable social outcomes. Understanding the objective helps investors evaluate whether a strategy is doing what it claims, what it owns, how performance should be measured and which trade-offs are being accepted. ## ESG Investing ESG investing incorporates environmental, social and governance information into security selection or portfolio construction. The factors may be used to identify risks and opportunities alongside conventional measures such as revenue, cash flow, profitability and valuation. ESG does not necessarily mean excluding particular industries. A manager might own an energy company while analysing emissions, transition plans, governance and regulatory exposure. The key question is how ESG information affects the investment decision. ## Socially Responsible Investing (SRI) SRI generally starts with the investor's values and uses defined screens or rules to include or exclude particular activities. Common exclusions can relate to tobacco, gambling, weapons or fossil fuels, depending on the mandate. SRI can provide a clear way to align a portfolio with personal preferences. The trade-off is that exclusions can narrow the investable universe and change sector, country or factor exposure. Investors should therefore review the resulting portfolio rather than assuming that a values-based strategy remains broadly diversified. ## Impact Investing Impact investing seeks both financial returns and a deliberate, measurable positive social or environmental outcome. Examples can include financing renewable-energy projects, affordable housing, financial inclusion or businesses providing essential services. Impact investing therefore puts greater emphasis on the connection between capital and a real-world outcome. Measuring that outcome can be more difficult than measuring a conventional portfolio return because the investor needs evidence of additionality, scale and persistence of impact. ## ESG vs SRI vs Impact: Key Differences | Dimension | ESG | SRI | Impact investing | | --- | --- | --- | --- | | Primary objective | Include ESG information in investment decisions | Align investments with stated values | Generate financial returns and measurable positive impact | | Typical method | Integration, screening, selection or engagement | Exclusions and values-based screens | Direct investment and impact-focused strategies | | Need to exclude industries? | No | Often, depending on mandate | Not necessarily | | Impact measurement | May not be the primary objective | Usually secondary | Central to the strategy | | Portfolio trade-off | May change factor and sector exposure | Can narrow the investment universe | Can reduce liquidity and increase concentration | ## ESG Is Not the Same as a High ESG Score An ESG strategy is a process, while an ESG rating is an assessment produced using a particular methodology. Different providers can reach different conclusions because they use different definitions, data and weighting systems. This is why investors should review how a fund uses ratings. A high average score does not necessarily mean that the portfolio matches a particular sustainability objective, and a lower score does not automatically mean that a company is financially unattractive. ## How Values and Financial Materiality Interact One of the biggest differences between these approaches is the role of financial materiality. ESG integration asks whether an environmental, social or governance issue could change a company's economic value or risk. SRI can exclude an activity regardless of its financial impact because the investor does not wish to own it. Neither approach is inherently superior. They solve different problems. The key is to avoid assuming that a fund's sustainability label tells you whether its objective is ethical alignment, financial risk management or measurable impact. ## Portfolio Construction Trade-Offs Exclusions and thematic mandates can change the structure of a portfolio. Removing certain industries can increase exposure to the sectors that remain. A thematic strategy can become concentrated in a small group of companies, while an impact portfolio may include less liquid private or project-based investments. Investors should therefore review the complete risk profile, including concentration, liquidity, volatility, drawdown and correlation. [Diversification analysis](https://blog.palance.co/the-power-of-diversification-in-investing) can show whether the sustainability objective has created an unintended concentration. ## How to Compare Sustainable Investment Funds - **Objective:** Is the fund targeting ESG integration, exclusions, values alignment or measurable impact? - **Methodology:** How are eligible companies and investments selected? - **Holdings:** What do investors actually own? - **Benchmark:** How different is the strategy from a conventional market index? - **Stewardship:** Does the manager engage with companies and how are outcomes assessed? - **Measurement:** What evidence supports the claimed ESG or impact outcomes? - **Costs and liquidity:** What fees, turnover and liquidity constraints apply? ## Performance Should Still Be Analysed Financially A sustainability objective does not remove the need for normal investment analysis. Investors should review valuation, business quality, earnings or cash flow, fees and risk-adjusted performance in addition to sustainability metrics. A portfolio can underperform because of its sector exclusions or factor tilts without meaning that the underlying investment process failed. Conversely, strong performance can result from market exposure rather than better ESG or impact selection. ## ESG, SRI and Impact in a Portfolio Different strategies can coexist within one portfolio. An investor might use an ESG-integrated core allocation, apply SRI exclusions to a specific sleeve and allocate a smaller portion to impact investments. The important discipline is to understand the role of each sleeve and its interaction with the rest of the portfolio. [Portfolio analytics](https://blog.palance.co/understanding-portfolio-analytics) can help assess concentration, correlation, drawdown and other exposures across the complete allocation. ## Common Mistakes - Assuming ESG, SRI and impact investing are interchangeable terms. - Choosing a fund based only on its sustainability label. - Using one ESG rating as a definitive measure. - Ignoring the portfolio changes created by exclusions or thematic exposure. - Evaluating impact without examining how outcomes are actually measured. - Forgetting that valuation and financial risk still matter. ## FAQ ### Is ESG the same as socially responsible investing? No. ESG usually incorporates environmental, social and governance information into analysis, while SRI more often begins with explicit values and uses exclusions or screens to implement them. ### Is impact investing the same as ESG? No. Impact investing places greater emphasis on generating and measuring a deliberate positive social or environmental outcome alongside financial returns. ### Can an ESG fund exclude fossil fuels? Yes, but it does not have to. The fund's methodology determines whether it uses exclusions, integration, engagement or another approach. ### Which approach is best? There is no universal answer. The appropriate approach depends on whether the investor's priority is financial materiality, values alignment, measurable impact or a combination. ## Related Reading Continue exploring this topic with our [ESG investing explained](https://blog.palance.co/esg-investing-align-financial-goals), [ESG investing strategies](https://blog.palance.co/exploring-the-esg-investment-method) and [drawbacks of ESG investing](https://blog.palance.co/unveiling-the-drawbacks-of-esg-investing). ## Conclusion ESG, SRI and impact investing are related but distinct approaches. ESG focuses on incorporating environmental, social and governance information into investment analysis; SRI typically uses values-based screens; and impact investing seeks measurable real-world outcomes alongside financial returns. Investors should look beyond the label and examine the methodology, holdings, benchmark, costs and portfolio risk. Once the objective is clear, it becomes much easier to choose a strategy that genuinely matches what the investor is trying to achieve. ###### Tags: [Thematic Investing,](https://blog.palance.co/tag/thematic-investing) [ESG](https://blog.palance.co/tag/esg) ![Palance](https://blog.palance.co/hs-fs/hubfs/palance_icononly.png?width=50&height=50&name=palance_icononly.png) Post by [Palance](https://blog.palance.co/author/palance) Mar 10, 2024, 6:15:54 PM Developing the world's most powerful portfolio intelligence tool. 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