SRI & CSR Risks

The facts and risks of the global CSR, SRI, Green, Eco & Ethical Investment Markets

1. Despite widely published claims, CSR/SRI is not ESG.

2. There are no standards within the global CSR/SRI markets, instead there are voluntary codes of practice activated by self disclosure

3. The entire SRI/CSR offering is based upon subjective viewpoints it contains no significant research or methodologies

4. The SRI/CSR Industry is driven by fee generation rather than intent to quantify risk

5. Credible and substantial evidence emanating from Financial Academia suggests that SRI/CSR investment practices actually increase investor risk

6. There is no connection between shareholder value generation and SRI.

7. Despite widely published claims, CSR/SRI is not ESG.

8. Quantative ESG practices are driven by non exclusionary, non prescriptive establishment of risk, once achieved this provides a common benchmark after which exclusionary filters may be added

9. SRI, does not set a common benchmark of compliance, therefore this practice merely complies with the viewpoint of Special Interest Groups, be they NGO or Industry based

10. Lack of a Global common standard ensures that there can be no real comparison of Corporate Environmental or Social impacts

11. SRI & CSR Groups actually spend more on Conferences, PR, advertising and similar practices than they dedicate to research and establishing common agreements

12. While large companies maintain significant SRI/CSR departments and policies, they do not maintain any form of self audit to ensure that these Policies are actually put into practice

What is the difference between SRI and ESG?

A study of words

Probus Sigma and this website as much as other companies and their online presences that operate in the environmental sector have been guilty of using the terms SRI and ESG in close proximity without due care and attention to ensure that the difference in their definitions is understood.

In this article where we refer to the difference between SRI and ESG metrics, the fact that the two concepts are distinctly different is assumed but not discussed separately at length. Now it’s time to do just that.

It has been stated [1] previously that the difference between ESG and SRI boils down to the fact that SRI implies that the motivation behind the investment is one of being “socially responsible” and that ESG considerations become part of the process which assesses if an investment is socially responsible or not. ESG-focused investment suggests that the motive for the investment is not born out of ethics, but just that this is a due consideration. In more sophisticated terms, “ESG integration (in investment) is motivated by economic imperatives and is a risk-analytics tool aimed at capturing the effects of environment, social and corporate governance considerations on the risk-adjusted return of portfolios [2].”

But let’s take a step back and think about the words. While SRI stands for Socially Responsible Investing, ESG stands for Environmental, Social and Governance. On face value there are obvious differences with each abbreviation’s anatomy. Socially Responsible Investing is a combination of three different types of words; Socially is an adverb, Responsible is an adjective and Investing is the present participle from the verb “to invest”. Together they form one action; to invest in a way that is socially responsible. To drill down further for an absolute definition, it would be necessary to specifically define “socially responsible”. In fact, having an understanding of what is “socially responsible” is key to determining what makes an SRI, and yet there is currently no global benchmark or definition. The consequences of which can easily be exploited or manipulated for advantage, often at the cost of those the SRI is supposed to be supporting.

Environmental, Social and Governance is a different combination of words and indeed the abbreviation should subsequently be used in a different way. Environmental and Social are both adjectives, i.e. descriptive words, and Governance is a noun, however together these words do not roll together to form an action, rather they stand very alone as separate but related concepts; factors that one should consider individually but as equally important parts of the same puzzle. They only gel together as a concept when added to another word – e.g. ESG factors, ESG investing, ESG considerations, ESG integration. In these examples it becomes clear that ESG is a more dynamic and encompassing terminology that can be applied in any number of contexts. It also lacks the weight of obligation that the “socially responsible” carries in SRI. ESG factors in an investment can be good, bad or ugly. SRI has to be socially responsible. But again there follows that pesky problem of defining “socially responsible” in investment terms without a global benchmark, the absence of which has seen those with vested interests in SRI establish their own rating agencies and special interest groups. It is for this reason that extreme care and caution should be employed when dealing with any SRI information and metrics.

The ambiguous definition of SRI is what we seek to highlight today. SRI has long been recognized as a broad investment category, [3] encompassing innumerable projects around the world, the majority of which at first glance appear wholesome and “socially responsible”. However, with no one single umbrella standard to define SRI or to provide a framework against which SRI is measured in terms of impact and effect, it is then down to agencies and special interest groups to oversee and analyse the benefits and returns for investors. When you consider that these special interest groups are often made up of those who have vested interests in the very projects and investments they are monitoring – because understandably they need the metrics for future investment – the ambiguity starts to deepen and darken into a murky shade of very opaque grey.

ESG is a more specific terminology that can (and should) be applied in any context of decision-making in business. There is growing evidence to suggest that ESG-focused investing is the future of responsible and sustainable investment. While ESG-focused investing need to also be transparent and independently monitored, ideally under the shelter of an umbrella standard, it has the potential to be the real measure of an investment that is not just “socially responsible” by any man’s definition but is also indisputably sustainable and beneficial for all stakeholders.


[1]http://www.marketwire.com/press-release/expert-available-complexities-environmental-social-governance-focused-esg-investing-1160652.htm

[2]http://www.probus-sigma.com/wp-content/uploads/downloads/2012/09/ESG-As-an-Investment-Tool.pdf

[3]http://www.marcgunther.com/2010/10/20/can-sustainable-investing-beat-the-markets/

Moi, la Finance et le Développement Durable