SRI and ESG are Not Interchangeable. Here’s Why We Choose SRI.
SRI investing leaves room for judgment calls that better align with investors’ values. Meanwhile, ESG investing is more vulnerable to companies gaming the system – artificially bumping up their scores with “greenwashing” tactics.


If you’ve been reading the news lately, you’ve likely heard a lot about ESG (Environmental, Social, Governance) and/or SRI (Sustainable, Responsible and Impact) investing. While the terms are commonly used interchangeably, there are stark differences between the two that every investor should be aware of.
SRI
Back when I founded my firm in 2004, SRI was called socially responsible investing – now it is sustainable, responsible and impact investing. Same idea but different terminology and more rigorous vetting. The qualitative strategy that SRI typically uses filters to select positive, solutions-based companies while screening out offenders, such as fossil fuel, weapons or tobacco companies.
It also incorporates the concept of shareholder advocacy – using the proxy process to engage with companies to be, among other things, better corporate citizens, more transparent and focused on risks, such as climate change. We’ve seen shareholder proposals focused on corporate political activity, board diversity and a range of environmental issues, including palm oil and pollution clean-up. Often, these proposals are withdrawn before a vote, because the company agreed to take steps to improve practices. This active engagement is an important aspect of SRI.

Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Another tool of SRI is divestment, which means selling an individual stock or economic sector, because of their negative impact and refusal to make change through engagement. Probably the biggest victory of the divestment strategy was the campaign to divest from companies doing business with the Apartheid government in South Africa in the 1970s and ’80s. Ultimately, as more and more investors chose this route, the government was forced to negotiate and eventually led to the dismantling of the system.
The biggest current divestment movement involves fossil fuel companies, but there are other movements, such as divesting from private prisons.
Unprecedented Growth
Since I founded my firm nearly 20 years ago, the SRI investing industry has seen unprecedented growth. According to the US SIF Trends Report, there was about $2 trillion in professionally managed responsibly in the U.S. in 2004. The latest report, released in November 2020, listed the assets at nearly $17 trillion, which is now equivalent to one in three professionally managed dollars in the United States.
Much of that growth is being led by millennials. According to Morgan Stanley’s Sustainable Signals report, 95% of millennials are interested in sustainable investing. It has also been found that most values-based investors have specific interests, including plastic reduction, climate change, circular economy and multicultural and gender diversity. And an overwhelming majority (85%) of millennials and the general population (71%) believe that it’s possible for their investment decisions to influence the amount of climate change caused by human activities.
Enter ESG
With that growth came the arrival of the quantitative strategy of ESG research and ratings. ESG research breaks down these three metrics (Environmental, Social and Governance) and assigns a score relative to either other companies in the sector or across the broad market. Human judgment in the process is minimal because it’s quantitative, not qualitative like SRI.
These ESG scores are used to create indexes and then mutual funds and ETFs. They have been wildly popular over the past few years and marketed heavily by the big investment shops. They are low cost and have little deviation from the standard benchmarks like the S&P 500.
Why SRI over ESG
From our experience, we have found that the ESG rating systems are imperfect. Without active human oversight, you will often find companies in the funds that should never be there – like Exxon Mobil, McDonald’s, Raytheon and DuPont. Holdings like these are unacceptable for investors who are looking to align their investments with their values – especially when you consider the investment preferences listed in the Morgan Stanley report. And even more unfortunate is that most people are trusting of big name “ESG” labels and aren’t empowered with the right questions to ask to ensure that what they are investing in is what they think it is.
ESG is simply a tool to help portfolio managers make informed decisions on which companies to buy and which to avoid. I do not believe it should be used to directly create investment portfolios.
ESG ratings can be gamed – for instance when a fossil fuel company attempts to increase their score, knowing they will never score high on “E” (Environment), they can increase charitable donations for “S” (Social) or add a woman or person of color to their board to increase “G” (Governance). But participating in deceptive “greenwashing” does not make the company sustainable or responsible. It just means it is another company hopping on the SRI investing bandwagon, taking advantage of the market opportunity, and making money from false advertising.
And more often than not, ESG simply makes the fund “less bad.” Instead, my firm prefers to focus on portfolios that incorporate positive, solutions-based companies and not a watered-down version of the S&P 500.
We truly believe there’s only one way to benchmark the future, and it’s not by looking at the past. SRI investing is about investigating each and every holding, thinking about the role it will play in a future you believe in, and asking yourself: What are the things that we need as a society going forward?
Get Kiplinger Today newsletter — free
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.

Peter Krull is the Partner and Director of Sustainable Investments at Earth Equity Advisors, a Prime Capital Financial Company, and has been specializing in sustainable, responsible and impact (SRI) investing for nearly 20 years. He earned the Chartered SRI Counselor® from the College for Financial Planning. In June 2024, Peter was recognized by InvestmentNews as the ESG/Responsible Investing Advisor of the Year. (Award was for the 2023 year, and no compensation was given.) Peter is a longtime advocate for sustainable, fossil-fuel-free investing and works hard to educate his clients and the public on greenwashing in the SRI/ESG industry. He is the host of "Dollars & Change," a podcast about sustainable and responsible investing, and he believes strongly in the power of positive, solutions-based sustainable investing focused on the economy of tomorrow.
-
2026 Disney Dining Plan Returns: Free Dining for Kids & Resort Benefits
Plan your 2026 Walt Disney World vacation now. Learn about the returning Disney Dining Plan, how kids aged three to nine eat free, and the exclusive benefits of staying at a Disney Resort hotel.
By Carla Ayers
-
How Can Investors Profit From AI's Energy Use?
Global energy demand is expected to grow by leaps and bounds over the next several years as AI usage accelerates. Here's how to get a piece of the pie.
By Jacob Schroeder
-
SRI Redefined: Going Beyond Socially Responsible Investing
Now that climate change has progressed to a changed climate, sustainable investing needs to evolve to address new demands of resilience and innovation.
By Peter Krull, CSRIC®
-
Here's When a Lack of Credit Card Debt Can Cause You Problems
Usually, getting a new credit card can be difficult if you have too much card debt, but this bank customer ran into an issue because he had no debt at all.
By H. Dennis Beaver, Esq.
-
Going to College? How to Navigate the Financial Planning
College decisions this year seem even more complex than usual, including determining whether a school is a 'financial fit.' Here's how to find your way.
By Chris Ebeling
-
Financial Steps After a Loved One's Alzheimer's Diagnosis
It's important to move fast on legal safeguards, estate planning and more while your loved one still has the capacity to make decisions.
By Thomas C. West, CLU®, ChFC®, AIF®
-
How Soon Can You Walk Away After Selling Your Business?
You may earn more money from the sale of your business if you stay to help with the transition to new management. The question is, do you need to?
By Evan T. Beach, CFP®, AWMA®
-
Two Don'ts and Four Dos During Trump's Trade War
The financial rules have changed now that tariffs have disrupted the markets and created economic uncertainty. What can you do? (And what shouldn't you do?)
By Maggie Kulyk, CRPC®, CSRIC™
-
I'm Single, With No Kids: Why Do I Need an Estate Plan?
Unless you have a plan in place, guess who might be making all the decisions about your prized possessions, or even your health care: a court.
By Cynthia Pruemm, Investment Adviser Representative
-
Most Investors Aren't as Diversified as They Think: Are You?
You could be facing a surprisingly dangerous amount of concentration risk without realizing it. Fixing that problem starts with knowing exactly what you own.
By Scott Noble, CPA/PFS