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The Difference Between ESG Factor Integration and SRI

Randy Bauslaugh, Partner at Canadian law firm McCarthy Tetrault.
Dr. Hendrik Garz, Leads Sustainalytics Global ESG Rating Products & Thematic Research teams.

Summary Note by Hillsdale:

Legislation, regulatory guidance and statements from agencies blur distinctions between SRI and ESG. Ontario 2016 Investment Guidance Note on ESG disclosure suggests there is a continuum between ESG and SRI, the authors contest this and state that there is not. Legally, non-economic goals or aspirations are at best distractions, and at worst depart from fiduciary duty. Therefore, SRI may not be consistent with fiduciary duty. ESG integration is related to financial performance or risk mitigation, while SRI is focused on moral or ethical imperative.

Taking ESG factors into account is not only allowable, but may be legally required. Fiduciaries should avoid statements in an investment policy that suggest that ESG factors are never taken into account. Fiduciaries are entitled to have an ethical or moral policy, but financial interests of beneficiaries should remain paramount. Unless legislated, fiduciaries cannot use pension funds to achieve social goals directly, but it can be used as a “tie-breaker”.

ESG Integration


Overall Approach

VAUE-driven approach

VALUES-driven approach


Typically inclusionary, focus on best in class

Typically exclusionary, avoid specific issues e.g. "sin stocks"


Focus on economic goals and financial materiality

Typically focus on moral or ethical goals

Fiduciary Duty

Consistent with fiduciary duty to consider material risks

May not be consistent with fiduciary duties

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