Sustainable investing methods: ESG vs impact investing vs SRI
Imagine investing in companies that not only perform well but also make a positive difference to the world. This article shows how ESG, SRI, and impact investing each do that in their own way – and why reading on could change how you think about your investment returns.
QUOTE
The more we invest with foresight; the less we will regret in hindsight.
Big ideas
- ESG investing is not a single strategy but a framework used by analysts to assess how environmental, social, and governance risks could affect a company’s long-term performance.
- Socially Responsible Investing (SRI) predates ESG and began as an ethical movement that excluded industries such as tobacco, alcohol, and weapons – a moral rather than analytical approach.
- Impact investing goes beyond screening or scoring; it directs capital to projects or businesses designed to create measurable social or environmental benefits alongside financial returns.
- ESG ratings often differ sharply between agencies because each uses its own data sources and weighting systems, meaning a company can score highly with one provider and poorly with another.
What is the difference between ESG and SRI vs impact investing?
Terms like ESG investing, Socially Responsible Investing (SRI), and impact investing are often used interchangeably. There is some overlap to be sure but they do refer to distinct approaches within the umbrella of sustainable finance.
Understanding the separation between them should help you decide what kind of change (if any) you hope to see from your capital.
Understanding the separation between them should help you decide what kind of change (if any) you hope to see from your capital.
- | ESG investing | Socially responsible investing (SRI) | Impact investing |
Idea | Environmental, social, and governance factors that influence financial performance | Ethical or moral values that guide inclusion or exclusion of certain industries | Creating measurable social and environmental outcomes alongside financial returns |
Primary goal | Identify and manage long-term risks and opportunities related to sustainability | Align investments with ethical values | Deliver tangible positive change while also getting competitive returns |
Approach | Integrate ESG data and rankings into research and portfolio analysis | Apply screens to avoid or include certain sectors such as tobacco, weapons, or gambling | Direct investment in businesses or funds that address global or local issues |
Measurement | ESG ratings and performance metrics relative to peers | Ethical criteria | Impact metrics and outcomes (often tied to the UN Sustainable Development Goals) |
Investment types | ESG ETFs, sustainability funds, ESG integration strategies | SRI ETFs, socially responsible index funds, exclusion-based portfolios | Impact funds, social bonds, private equity, or community finance projects |
Difference | Focuses on financial materiality of ESG factors | Centred on moral or ethical screening | Prioritises measurable real-world impact |
What ESG really means in investing
DEFINITION
ESG stands for Environmental, Social, and Governance, and it refers to a framework used to assess how companies manage risks and opportunities related to sustainability.
As an individual investor, you might encounter this term through an ESG score or rating shown beside a company name or fund on a trading platform. These scores summarise how well a company manages environmental, social, and governance risks versus its peers.
When browsing ESG funds or socially responsible investment options, a higher score generally suggests stronger management of sustainability and its related risks, though methods vary between rating providers.
For most investors, ESG serves as a way to see whether a company’s practices align with long-term stability, rather than a signal to buy or sell.
When browsing ESG funds or socially responsible investment options, a higher score generally suggests stronger management of sustainability and its related risks, though methods vary between rating providers.
For most investors, ESG serves as a way to see whether a company’s practices align with long-term stability, rather than a signal to buy or sell.
Who decides ESG ratings? And what shapes them
ESG scores are determined by independent rating agencies and data providers, not by the companies themselves.
The main global ESG rating firms include:
The main global ESG rating firms include:
- MSCI
- Sustainalytics (Morningstar)
- FTSE Russell
- Refinitiv
- ISS ESG
- Bloomberg
Each has its own scoring model, so a company’s rating can differ significantly between providers.
An ESG score combines hundreds of data points drawn from company reports, regulatory filings, news coverage, and third-party research. These data points are grouped into three broad categories:
An ESG score combines hundreds of data points drawn from company reports, regulatory filings, news coverage, and third-party research. These data points are grouped into three broad categories:
- Environmental (E): greenhouse gas emissions, energy efficiency, waste management, water use, and exposure to climate risks.
- Social (S): employee welfare, diversity, supply chain standards, customer privacy, and community impact.
- Governance (G): board composition, executive pay, shareholder rights, internal controls, and transparency.
Usually the industry in question will affect the weightings of the data points involved. It makes sense that carbon emissions would weigh heavily for energy firms but less for software companies.
It is worth noting that the lack of global standardisation and as a result, what some have described as arbitrary methods, means ESG is probably best viewed as another analytical input besides your usual investment criterion.
It is worth noting that the lack of global standardisation and as a result, what some have described as arbitrary methods, means ESG is probably best viewed as another analytical input besides your usual investment criterion.
Key factors in ESG investing
If you are serious about adding ESG as a component in your investments, the below are the key factors to act on:
1. Governance in ESG
Strong governance reflects how a company is led and whether decisions protect long-term stakeholder interests. Board structure, executive pay, shareholder rights, and ethics help signal whether leadership can manage regulatory or reputational risks.
2. ESG as a risk tool
ESG data act as early warning signs. Weak environmental, social, or governance practices can point to future fines, supply-chain problems, staff turnover, or carbon-related costs, helping investors anticipate risks before they hit performance.
3. Screening approaches
Negative screening excludes sectors that fail sustainability criteria. Positive screening highlights companies with strong or improving ESG performance. Many strategies blend both.
4. ESG integration
Integration folds ESG factors directly into financial analysis, treating sustainability as part of earnings quality, risk, and growth potential rather than a standalone filter.
5. Thematic ESG investing
Investing in ‘themes’ within the market has grown in popularity in recent years and ESG has been a big part of it. It is the same concept as investing in a sector- the companies within the theme tend to be working towards a similar goal or are part of a new area of technology.
If you can time it right, areas like clean energy, climate and AI can offer exposure to these trends but also see big fund flows from investors, pushing up the values of related funds.
As of December 2025, according to JustETF - these are the 10 largest sustainable ETFs in Europe by market cap.
If you can time it right, areas like clean energy, climate and AI can offer exposure to these trends but also see big fund flows from investors, pushing up the values of related funds.
As of December 2025, according to JustETF - these are the 10 largest sustainable ETFs in Europe by market cap.
Fund Name | Fund Size (m €) | 1Y Perf (%) | 5Y Perf (%) | Ticker |
iShares MSCI Europe Screened UCITS ETF EUR (Acc) | 4,498 | 14.82% | 69.44% | SLMC |
iShares MSCI Europe ESG Enhanced CTB UCITS ETF EUR (Dist) | 4,101 | 12.78% | 61.99% | EMNU |
UBS EURO STOXX 50 ESG UCITS ETF EUR dis | 2,998 | 23.10% | 107.36% | UET5 |
BNP Paribas Easy MSCI Europe Min TE UCITS ETF | 2,942 | 14.89% | 66.76% | EEUX |
iShares MSCI Europe SRI UCITS ETF (Acc) | 2,940 | -0.61% | 39.36% | IUSK |
JPMorgan Europe Research Enhanced Index Equity (ESG) UCITS ETF EUR (acc) | 2,696 | 15.22% | 71.24% | JREE |
iShares MSCI EMU ESG Enhanced CTB UCITS ETF EUR (Acc) | 2,527 | 19.26% | 71.09% | EDM4 |
iShares MSCI Europe ESG Enhanced CTB UCITS ETF EUR (Acc) | 1,665 | 13.53% | 62.71% | EDM6 |
Amundi MSCI EMU ESG Selection UCITS ETF DR - EUR (C) | 1,501 | 17.42% | 61.71% | AMED |
Amundi STOXX Europe 600 ESG UCITS ETF DR EUR (C) | 1,392 | 14.94% | 67.09% | AME6 |
Disclaimer: Past performance doesn’t guarantee future results. This information is not investment advice. Do your own research.
It is not just activist investors like Carl Icahn or Dan Loeb that can have an effect on corporate behaviour. Everyday investors through voting and engagement and simply their choice of investment can push for improvements.
DEFINITION
Socially Responsible Investing considers whether a company’s activities fit within a moral or social framework.
It began as an ethical movement where investors actively avoided certain industries such as tobacco, gambling, or weapons. Modern socially responsible investment strategies still rely heavily on screening, but they may also include SRI ETFs or index funds that reflect specific ethical priorities.
It began as an ethical movement where investors actively avoided certain industries such as tobacco, gambling, or weapons. Modern socially responsible investment strategies still rely heavily on screening, but they may also include SRI ETFs or index funds that reflect specific ethical priorities.
The essence behind SRI is that by investing in a company, you are offering it support. Therefore, you can choose to support companies and industries you believe are doing good and remove your support from those you believe to be doing bad.
It is a similar idea to something like ‘Buy British’ whereby you choose to buy lamb from Wales instead of New Zealand to support Welsh farmers, even if it has little impact on the actual food you receive.
It is a similar idea to something like ‘Buy British’ whereby you choose to buy lamb from Wales instead of New Zealand to support Welsh farmers, even if it has little impact on the actual food you receive.
Ethical screening: Excluding Sin stocks
The foundation of SRI lies in ethical screening, often called negative screening. Historically, investors avoided sectors such as tobacco, gambling, alcohol, weapons, or fossil fuels — sometimes referred to as “sin stocks.” The aim was not to judge profitability but to ensure portfolios reflected defined values.
Over time, this screening process has become more sophisticated. In fact, many socially responsible investment strategies now use data from ESG investing firms to refine which companies qualify.
Over time, this screening process has become more sophisticated. In fact, many socially responsible investment strategies now use data from ESG investing firms to refine which companies qualify.
What is impact investing and why it matters
DEFINITION
Impact investing targets measurable social or environmental outcomes alongside financial returns.
That could mean funding clean water projects, renewable energy start-ups, or social housing ventures. It used to just be in private markets in so-called impact investing funds, but there’s growing activity in impact investing ETFs, available to all investors via public markets.
That could mean funding clean water projects, renewable energy start-ups, or social housing ventures. It used to just be in private markets in so-called impact investing funds, but there’s growing activity in impact investing ETFs, available to all investors via public markets.
While ESG and SRI are ways to assess or screen existing companies, impact investing is more about actively building-up companies that are deemed worthy of making an impact.
It begins by defining a problem, such as access to clean energy, affordable housing, or financial inclusion, and then seeks out investments that can address that challenge directly.
There are specialist platforms for impact investing that highlight the outcomes associated with each project, here are some well-known ones:
It begins by defining a problem, such as access to clean energy, affordable housing, or financial inclusion, and then seeks out investments that can address that challenge directly.
There are specialist platforms for impact investing that highlight the outcomes associated with each project, here are some well-known ones:
- ImpactAssets: Offers an Impact Investment Platform featuring vetted opportunities in public and private markets, including debt, equity, and thematic portfolios such as climate solutions and financial inclusion.
- Toniic: A global community and platform for impact investors; provides resources, peer-networks and research for portfolios 100% aligned with positive net impact across asset classes.
- Swiss Platform for Impact Investing (SPII): A national-level initiative based in Switzerland that connects stakeholders across the impact ecosystem and supports transparency and market growth in sustainable finance.
- NPTrust (in partnership with CapShift): Provides a customised impact-investing platform for donor-advised funds, thematic impact portfolios and curated opportunities across areas such as affordable housing, sustainable agriculture and climate change.
Measuring positive impact: metrics and outcomes
The way this works is that potential projects are evaluated using clear indicators, for example tonnes of carbon avoided, number of households gaining access to clean water, or improvements in local employment. These metrics help demonstrate that capital has contributed to genuine change rather than general corporate responsibility claims.
Examples of impact investments in action
According to SoPact, Impact investing supported the affordable housing company MuniMae in the United States. Institutional investors provided $25M in funding, enabling the construction of 500 units for low-income families. The project delivered a stable 7% annual return over five years, with independent audits confirming a 95% occupancy rate and significant improvements in local housing stability.
In another example, impact investors funded $10M for d.light, a solar energy company in Kenya. This capital expanded access to affordable solar-powered lamps and home systems, reaching over 2 million off-grid households. Verified reports confirmed reduced reliance on kerosene, improved air quality in homes, and energy costs cut by 60% for families, with investors earning 8% annual returns.
In another example, impact investors funded $10M for d.light, a solar energy company in Kenya. This capital expanded access to affordable solar-powered lamps and home systems, reaching over 2 million off-grid households. Verified reports confirmed reduced reliance on kerosene, improved air quality in homes, and energy costs cut by 60% for families, with investors earning 8% annual returns.
Private vs public markets in impact investing
Historically, most impact opportunities were in private markets, often through impact investing private equity, venture capital, or community finance. In recent years, public markets have expanded their offering, with more impact investing ETFs, listed green bonds, and thematic funds. These provide a more accessible route for individuals wanting exposure to impact themes within a diversified portfolio.
The UN sustainable development goals and impact strategies
The UN’s sustainable development goals aim to provide a shared global framework that covers areas such as clean energy, education, health, gender equality, and climate action.
Even if well-intended, these goals could have unintended consequences that are worth considering when you are investing on ethical grounds.
For example:
Even if well-intended, these goals could have unintended consequences that are worth considering when you are investing on ethical grounds.
For example:
- Global targets could lead to increased centralised regulation, where international bodies have more influence over national policies.
- Harmonised standards might shift economic power toward large corporations that can more easily meet reporting requirements.
- Climate-related measures could raise costs for smaller businesses or households disproportionately versus larger competitors.
- Coordinated global frameworks might reduce national sovereignty in areas such as energy, agriculture, or industry.
For investors, referencing the SDGs helps clarify which issues a fund or project aims to address and how its outcomes are monitored.
Comparing ESG and impact investing
In what ways do investors use different strategies?
Someone focusing on ESG might compare ESG scores, review sustainability reports, or explore ESG funds that integrate this data into financial analysis.
A person interested in impact investing is more likely to look at impact investing funds, community finance opportunities, or thematic products that report specific social or environmental outcomes.
A person interested in impact investing is more likely to look at impact investing funds, community finance opportunities, or thematic products that report specific social or environmental outcomes.
ESG approaches usually aim to match traditional performance while incorporating sustainability information.
Impact investing aims for both a financial outcome and a measurable social or environmental benefit, whether through private equity, listed impact ETFs, or targeted thematic funds.
When deciding which route to go down, it really depends on whether the priority is understanding corporate practices (and being OK with them enough to invest) or contributing directly to defined outcomes, which in some cases might be at the expense of some returns.
Impact investing aims for both a financial outcome and a measurable social or environmental benefit, whether through private equity, listed impact ETFs, or targeted thematic funds.
When deciding which route to go down, it really depends on whether the priority is understanding corporate practices (and being OK with them enough to invest) or contributing directly to defined outcomes, which in some cases might be at the expense of some returns.
Challenges in sustainable investing
Some of the issues mentioned below could also be said to still exist and have been a factor in interest in sustainable investment dwindling over the past few years.
The dangers of greenwashing in ESG and impact investing
Challenge 1: Honest companies and ESG funds face pressure to look way more green than they are in an attempt to attract extra investment, which clouds legitimacy with investors — even for the honest players.
Possible answer: There is typically something about a company’s business model or the contents of a fund that, with a little bit of common sense, you can more easily figure out where to spot the greenwashing. Third-party verification is another
Possible answer: There is typically something about a company’s business model or the contents of a fund that, with a little bit of common sense, you can more easily figure out where to spot the greenwashing. Third-party verification is another
ESG ratings: Why they differ across agencies
Challenge 2: The ESG ratings you find will vary widely because agencies use different models, weighting systems, and data sources. This is good for verification but can confuse the issue.
Possible solution: Compare several data providers and review the underlying methodology to see what fits best for a particular investment or choose a favorite and factor in the possible inconsistencies over time.
Possible solution: Compare several data providers and review the underlying methodology to see what fits best for a particular investment or choose a favorite and factor in the possible inconsistencies over time.
Common misconceptions about sustainable investing
Challenge 3: Because it is a relatively new feature of investing after decades of the same financial metrics - there are some points of confusion. Some people assume ESG, SRI, and impact investing all mean the same thing or think incorporating sustainable ideas automatically lead to lower returns.
Possible solution: Just get to know the purpose of each approach. ESG focuses on risk, SRI on values, and impact investing on measurable outcomes. Each carries its own expectations and trade-offs.
Possible solution: Just get to know the purpose of each approach. ESG focuses on risk, SRI on values, and impact investing on measurable outcomes. Each carries its own expectations and trade-offs.
The limitations of public market ESG strategies
Challenge 4: Public companies disclose different levels of sustainability data, and even for those who report more, the details are harder to track, especially inside standard reporting.
Potential approaches: ESG scores as well as qualitative analysis, relevant corporate documents, and overarching sustainability disclosures.
Potential approaches: ESG scores as well as qualitative analysis, relevant corporate documents, and overarching sustainability disclosures.
Potential in ESG and impact investing
While silence is no disavowal, many recognise the scope for collective action, including investors, directed toward a sustainable future. Thus, the scope to invest, perhaps under emerging concepts like ‘transition investing’ is unlikely to diminish.
Growth of ESG and impact ETFs and mutual funds
Proliferation of ESG and impact ETFs and mutual funds is a reality. More impact investing ETFs and ESG funds are being offered, enabling investors to engage more deeply with sustainability issues. Many of these funds provide transparency in their reporting on company selection and evaluation. Leading investment theme: renewable energy.
Renewable energy as a leading investment theme
One need only look at the performance of Tesla (TSLA) shares to demonstrate the large interest in renewable energy and the way it can be deployed, for example in electric vehicles.
Clean energy continues to be a major focus, with wind, solar, and related technologies featuring strongly in both ESG strategies and impact-focused products.
Please note this information is not investment advice. Do your own research.
Clean energy continues to be a major focus, with wind, solar, and related technologies featuring strongly in both ESG strategies and impact-focused products.
Please note this information is not investment advice. Do your own research.
Healthcare, education, and financial inclusion opportunities
Social themes such as healthcare access, education technology, and financial inclusion are becoming more prominent, supported by a wider range of impact investing companies and platforms.
Long-term returns from purpose-driven portfolios
Some investors see sustainability as part of long-term economic resilience. ESG data and impact reporting offer ways to consider how environmental and social factors may shape future performance.
Recap
The field of sustainable finance is composed of ESG, SRI, and impact investing, all of which consist of varying priorities and approaches.
ESG examines the relevance of certain Environmental, Social, and Governance factors in determining the performance of a corporation over the long term, while SRI examines the ethical implications and chooses to participate or abstain from certain activities. Meanwhile, impact investing is focused on obtaining a specified social or environmental return as well as a financial return.
ESG examines the relevance of certain Environmental, Social, and Governance factors in determining the performance of a corporation over the long term, while SRI examines the ethical implications and chooses to participate or abstain from certain activities. Meanwhile, impact investing is focused on obtaining a specified social or environmental return as well as a financial return.
FAQ
Q: What is the difference between ESG and SRI vs impact investing?
ESG examines the impact of Environmental, Social, and Governance factors on the long-term performance of a company. SRI is more focused on ethical or values-driven exclusionary or inclusionary screening, while impact investing is more focused on social and/or environmental measurable outcomes in combination with a financial return.
Q: Is SRI the same as ESG?
No. SRI is more values-driven and is typically focused on ethical screening, whilst ESG is more of an analytical framework focused on how factors such as sustainability impact financial performance.
Q: What is SRI in investing?
SRI is an approach that aligns investments with specific ethical, social, or environmental principles, often through screening.
Q: What is an SRI ETF?
An SRI ETF tracks an index built around ethical criteria, typically excluding sectors such as weapons, tobacco, or gambling.
Q: What is the difference between SRI and SRRI?
SRI refers to Socially Responsible Investing, while SRRI is the Synthetic Risk and Reward Indicator used in fund documentation to show a fund’s risk level.
Q: What is the difference between ESG and EIA?
ESG evaluates companies on environmental, social, and governance factors, while an Environmental Impact Assessment (EIA) examines the environmental effects of a specific project.
Q: What is the difference between ESG and sustainable investing?
ESG is a framework for analysing corporate behaviour, whereas sustainable investing is a broader term that includes ESG, SRI, and impact-focused approaches.
