Socially Responsible Investing
Socially Responsible Investing (SRI) is an investment strategy that excludes or underweights companies whose activities conflict with ethical, religious, or moral values, while actively favoring businesses whose practices align with those values.
SRI predates the modern ESG framework by decades. Its earliest practitioners were faith-based institutions — Quaker organizations in the 18th century refused to invest in the slave trade, and 20th-century religious endowments famously avoided tobacco, alcohol, and weapons manufacturers. The strategy gained mainstream momentum in the 1970s and 1980s when US universities faced student pressure to divest from companies operating in apartheid-era South Africa.
The core mechanism is screening. Negative screening excludes entire sectors — fossil fuels, gambling, firearms, tobacco, adult entertainment — regardless of each company's individual behavior. Positive screening, sometimes called best-in-class, retains sector coverage but selects only the companies within each industry that demonstrate the strongest social or environmental performance relative to peers.
Norms-based screening filters out companies that violate international standards such as the UN Global Compact or OECD Guidelines for Multinational Enterprises. This approach is particularly common among Scandinavian sovereign wealth funds and European pension schemes.
SRI and ESG are related but distinct. SRI is primarily values-driven: the investor excludes companies because they find certain activities objectionable regardless of the financial implications. ESG integration is more analytically driven: it incorporates environmental, social, and governance data as additional risk factors within a conventional financial model, without necessarily excluding any sector outright.
The US Forum for Sustainable and Responsible Investment (US SIF) tracks the growth of SRI assets in the United States, which have grown substantially as retail investors gained access to SRI-screened mutual funds and ETFs. Morningstar's Sustainability Rating provides individual investors with a standardized way to compare the ESG profiles of fund options within their 401(k) or brokerage account.