Three acronyms dominate every conversation about investing with values: ESG, SRI, and impact investing. They get used interchangeably, mixed up constantly, and explained badly. If you've ever nodded along while someone mentioned "ESG screening" without really knowing what they meant, this is the guide that fixes that.
These three approaches aren't the same thing. They represent three different levels of commitment to how your money interacts with the world. Understanding the difference matters because it determines what your investment actually does (or doesn't do).
the quick version
| approach | what it does | analogy |
|---|---|---|
| ESG | Scores companies on environmental, social, and governance practices. Used to manage risk. | Checking the restaurant's health rating before eating there |
| SRI | Excludes specific industries (weapons, tobacco, fossil fuels) based on values. Avoidance-focused. | Refusing to eat at a restaurant that serves shark fin |
| Impact investing | Actively invests in companies solving problems. Requires measurable outcomes alongside returns. | Funding the restaurant that sources locally, pays fairly, and composts everything |
ESG checks the label. SRI avoids the bad. Impact investing funds the good. They're not mutually exclusive. Most serious impact funds use all three. But knowing the difference helps you read marketing with sharper eyes.
ESG: the risk lens
ESGEnvironmental, Social, and Governance. Three categories used to judge how responsibly a company operates. It's a scoring framework, not an investment strategy. stands for Environmental, Social, and Governance. It's a framework for evaluating how well a company manages risks across those three areas. Investopedia's ESG overview covers the technical details.
The important thing to understand: ESG is a scoring system, not a moral filter. A fossil fuel company can score well on ESG if it manages its environmental risks effectively, treats employees well, and has a diverse board. The company is still extracting fossil fuels. The ESG score doesn't change what the company does. It measures how well the company manages the risks associated with what it does.
This is why "ESG fund" is a label that needs interrogation. Some ESG funds hold oil companies. Some hold mining stocks. The ESG integration doesn't mean those companies are making the world better. It means the fund manager believes those companies are managing their ESG risks better than their peers. That's a useful thing to know. But it's different from ethical investing.
SRI: the values filter
Socially Responsible Investing (SRI) takes a different approach. Instead of scoring companies on how well they manage risk, it draws hard lines. Certain industries are out, regardless of how well they're managed.
| commonly excluded | reason |
|---|---|
| Tobacco | Products designed to addict and harm |
| Weapons | Direct role in conflict and civilian harm |
| Fossil fuels | Climate damage, environmental destruction |
| Gambling | Exploitation, addiction, social harm |
| Modern slavery supply chains | Human rights violations |
SRI is values-based, not risk-based. It doesn't ask "is this company managing its ESG risks well?" It asks "should this company exist in my portfolio at all?" That's a fundamentally different question.
The limitation of SRI on its own is that it only tells you what's not in the portfolio. Excluding tobacco and weapons is a good start, but it doesn't tell you what the remaining companies are actively doing. A fund that excludes the bad but doesn't seek the good is only half the picture.
impact investing: the active approach
Impact investing goes further than both. It doesn't just score companies (ESG) or exclude bad ones (SRI). It actively selects companies that are creating measurable positive outcomes in the world. The Global Impact Investing Network (GIIN) defines it as investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return.
The key words are intention and measurable. An impact fund doesn't just happen to hold companies that are doing good. It deliberately selects them because of the good they do, and it measures the outcomes. How much carbon was avoided. How many people accessed healthcare. How many jobs were created in underserved communities.
Sectors where impact capital makes a real difference:
- Clean energy — solar, wind, battery storage, grid modernisation
- Healthcare access — telehealth, affordable diagnostics, mental health services
- Sustainable food — regenerative agriculture, food waste reduction, plant-based alternatives
- Financial inclusion — banking for the unbanked, microfinance, accessible insurance
- Circular economy — waste-to-resource companies, recycling infrastructure, sustainable packaging
how the three work together
The best funds use all three. ESG data helps identify well-managed companies. SRI screening removes industries that don't belong in a values-aligned portfolio. Impact criteria ensure the remaining companies are actively contributing to positive outcomes.
Think of it as three filters stacked:
- ESG filter: removes companies that manage environmental, social, or governance risks poorly
- SRI filter: removes entire industries that conflict with the fund's values
- Impact filter: from what's left, selects companies with measurable positive outcomes
A fund that only uses ESG might still hold fossil fuel companies. A fund that only uses SRI knows what it doesn't want but not necessarily what it does want. A fund that uses all three has a clear picture of what's in the portfolio and why.
The RIAA tracks which Australian funds use which approaches and certifies those meeting genuine responsible investment standards. Their annual benchmark report is the best public resource for comparing how different funds apply these frameworks.
what to look for when choosing a fund
When a fund uses these terms in its marketing, ask these questions:
- "ESG integrated" — does this mean they score companies, or actually exclude low scorers? Some funds integrate ESG data but still hold every company in the index.
- "Ethical" or "responsible" — what's the exclusion list? If they won't publish it, the screening may be loose.
- "Impact" — what outcomes do they measure? How often do they report? Per-holding data or portfolio-level averages?
At inaam, we use all three approaches. ESG data informs company evaluation. SRI screening removes industries that don't align with our values. And our impact methodology selects companies across five pillars — health, energy, waste, food systems, and responsible consumption — with measurable outcomes tracked per holding. You can see exactly how on our methodology page.