ESG investing, SRI and CSR

As has happened so often before, when a concept becomes mainstream, it is used in so many contexts and so repeatedly that its meaning ends blurred. It has happened with other terms such as sustainable, green or healthy. In this article, we will review the key concepts so that you can have a clear view of what ESG investing is, and what it is not. Let's get started!

ESG investing is an asset valuation mechanism in which potential investors recognise the value of Environmental, Social and Governance aspects and integrate them into their risk and opportunity assessment models, allowing the investor to include a range of previously externalised economic and non-economic impacts and consider how they might affect the value of the asset over the long term.

The term Socially Responsible Investment (or SRI) is often used synonymously, however, this is a broader concept.

The PRI (Principles for Responsible Investment) defines responsible investment as a strategy and practice to incorporate environmental, social and governance (ESG) factors in investment decisions and active ownership.

In other words. While ESG investing is a technique for integrating non-financial risks and opportunities in the analysis of assets, SRI is the set of extra-financial values that investors consider in their selection process and which represent a second purpose, in addition to profitability. This SRI policy will use, among other mechanisms, ESG analysis to pursue other objectives in addition to financial performance, such as social impact in underdeveloped countries, the development of renewable energies, the achievement of the SDGs, etc.

Corporate Social Responsibility: another related but different term. CSR is an approach to business management in which the needs of different stakeholders are integrated into decision-making, combining the pursuit of financial profitability with positive social and environmental impact.

To simplify, one could say that CSR is the soul and character of a company, SRI is the policy that sets the extra-financial preferences of the potencial investor, and ESG investing is one of the analysis mechanisms available to ensure that the company meets the investor's preferences.

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