In 1971, two ministers in the US created the Pax World Fund – the first mutual fund that considered social criteria as well as financial performance when selecting investments.
The investment product, which still exists today, was born out of a culture that was starting to recognise the importance of social issues. Many US citizens, including the creators of the fund, opposed the Vietnam War and wanted to boycott any companies that supported the conflict.
Other social issues such as racial and gender equality were increasingly part of the national conversation, and the first Earth Day took place in 1970.
The Pax World Fund meant investors could build wealth without compromising their personal morals.
Since then, environmental and social issues have become more important to many investors, especially as we recognise the need to protect the planet.
Consequently, the parameters first developed by the Pax World Fund eventually developed into the environmental, social, and governance (ESG) framework for investment funds.
If you want to align your investments with your ethical values, you might opt for ESG investments. However, you could also explore “socially responsible investing” as this may be more suited to your goals.
While it is similar to ESG investing in some ways, there are some crucial differences that set socially responsible investing apart.
Read on to learn more.
ESG fund managers use a specific framework for choosing investments
ESG investing uses a specific framework to assess an organisation and whether it meets certain standards. Typically, fund managers use the ESG criteria to choose which companies to invest in.
They will consider these three areas:
- Environmental – The effects that the company has on the environment and the steps it takes to make its operations more sustainable. For instance, is the business reducing energy usage or increasing the amount of waste it recycles.
- Social – The social responsibility that the company shows to employees and the wider community. This may include working conditions and employee rights, as well as charity initiatives.
- Governance – The way that the company is run and the procedures in place to ensure ethical practices. This could include how diverse the board of directors is or whether the company pays its taxes.
Companies are given an ESG score based on these criteria, allowing fund managers to determine whether an investment is ethical enough to be included in the fund.
Bear in mind that financial performance is still a priority for fund managers and they will balance investments in much the same way as they would in non-ESG funds. The key difference is that they will only select investments from a pool of companies that meets the ESG criteria described above.
In 2024, the Financial Conduct Authority (FCA) introduced new labelling rules to improve clarity around ESG investments. The guidelines also aimed to reduce instances of “greenwashing” – companies or funds claiming to be more sustainable than they are.
As such, if you want to make sustainable and socially conscious investments, you might opt for ESG funds.
Socially responsible investing focuses on specific companies and the positive change they can bring
Socially responsible investing is similar to ESG investing in that both strategies aim to support ethical practices and align with your values.
However, socially responsible investing focuses on selecting specific companies that further social or environmental causes that are important to you, rather than investing in ESG funds.
For example, you might invest in a business that’s developing improved renewable energy technology. By putting your wealth behind this company, you’re actively supporting practices that could reduce damage to the environment.
You may also select companies that generally operate in a way you consider positive and sustainable.
The criteria you consider might cross over with ESG investing to some extent. For example, you might assess:
- The way a business treats its employees
- Any charitable work the company engages in
- The environmental responsibility of the business
- The ethics of the products the company produces (socially responsible investors might avoid tobacco or weapons companies, for example).
Despite this crossover, another crucial difference is that ESG investments use an existing framework to determine the ethical merits of a company. In comparison, socially responsible investing involves considering your own values and deciding which social or environmental issues are most important to you.
In some cases, investors prioritise their ethical goals and financial aims are secondary. That doesn’t necessarily mean you won’t generate positive returns from socially responsible investments. Although, some investors may be willing to accept a lower level of growth to support their wider moral goals.
It is important that socially responsible investments are part of a well-diversified portfolio
You might be interested in socially responsible investing if there are specific social causes or environmental issues you want to address with your investments.
However, if you’re selecting specific investments, your portfolio may be concentrated on a handful of companies. This compares with ESG funds, which typically consist of a range of products and fund managers may spread investments across different industries and geographical areas.
As such, socially responsible investing could expose you to a significant level of risk. If a few of the businesses you’ve invested in face difficulties, the overall value of your portfolio could be disproportionately affected.
That’s why it’s important that your socially responsible investments are part of a well-diversified portfolio that incorporates a range of product types and covers different industries and countries.
This could mean that losses in certain areas are offset by gains from other investments.
We can help you build a well-balanced portfolio so you can support your ethical values while also building wealth and creating a secure future.
Get in touch
If you want to explore your options for socially responsible and ESG investing, we can support you.
Please contact us at hello@ardentuk.com or call or WhatsApp us on 01904 655 330. As an award-winning financial advice company with advisers included in the 2025 VouchedFor Top Rated guide, you can be sure that we’re a bona fide company providing excellent advice and high-quality service.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
All information is correct at the time of writing and is subject to change in the future.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.