Key Takeaways:
- ESG, SRI, and impact investing are three different methods: SRI excludes, ESG scores, and impact targets. Values-based and mission-aligned investing are umbrella terms for any of them.
- Under UPMIFA, the state law (adopted in most states) that governs how charitable organizations invest, it is our understanding that a board may consider its mission when investing, as long as the portfolio stays prudent and diversified. Associations follow a similar standard under their own governing law.
- Restrictions may cause a portfolio to perform differently from the broad market, in either direction, and may add cost. The board controls the scope, the cost, and how the effect is measured.
- The decision belongs to the board, not the advisor or the fund manager, and it should be written into the investment policy statement.
- The right approach follows from the reason the question came up: a direct conflict points to SRI screening, a general wish to reflect values points to ESG integration, and a programmatic goal points to an impact allocation.
Educational / General Disclaimer: This article is for informational and educational purposes only and does not constitute investment, legal, or tax advice. The considerations described here reflect Raffa’s perspective as an investment advisor serving nonprofits and associations, and other advisors may weigh them differently. Raffa Investment Advisers is a registered investment adviser. Each organization’s financial situation is unique. Please consult with a qualified investment professional before making financial decisions.
Values-based investing is the practice of reflecting an organization’s purpose or values in how its reserves are invested. The question usually reaches a finance committee from a donor, a member, or a new board member, and it usually arrives with ESG investing, socially responsible investing (SRI), impact investing, and mission-aligned investing used interchangeably. Each term describes a different method with a different effect on the portfolio. The starting point is a governance decision about what the organization’s values are and how far the portfolio should reflect them, not a product or a fund.
The starting point is a governance decision about what the organization's values are and how far the portfolio should reflect them, not a product or a fund.
This article covers what the terms mean and how they differ, whether values-based investing is consistent with a board’s fiduciary responsibility, what it tends to mean for performance and fees, how to choose among the three common approaches, and the decision process we recommend before anything is written into policy.
ESG vs. SRI vs. Impact Investing: What Each Term Means
ESG, SRI, and impact investing are three different methods of reflecting an organization’s values in its portfolio, a practice known under the umbrella terms values-based investing or mission-aligned investing. ESG evaluates the companies a portfolio owns, SRI decides what it will not own, and impact investing directs capital toward a specific outcome. These are the three most common approaches; others a board may encounter, such as faith-based screening, positive or best-in-class screening, and program-related investments, are variations of them.
ESG evaluates the companies a portfolio owns, SRI decides what it will not own, and impact investing directs capital toward a specific outcome.
What Is ESG Investing?
ESG investing evaluates companies on environmental, social, and governance criteria and weights holdings according to how they score. It answers the question “how do environmental, social, and governance factors affect the companies we own?” ESG is a set of criteria for evaluating companies, not a list of companies to avoid, so a fund that uses ESG integration may still hold companies in every sector. An environmental nonprofit that wants its reserves to stay fully diversified might hold an ESG-integrated fund that owns every sector, energy included, but weights toward companies with lower carbon intensity and stronger environmental disclosure, rather than excluding energy altogether. Sustainable investing and responsible investing are usually used as synonyms for an ESG or blended ESG and SRI approach, and the labels are shifting: the US SIF Sustainable Investing Trends Report 2025/2026, released in December 2025, found that one in four U.S. asset managers surveyed had stopped using the ESG acronym while continuing the underlying practices.
What Is SRI (Socially Responsible Investing)?
Socially responsible investing (SRI) excludes companies or industries that conflict with an organization’s values, such as tobacco, weapons, or gambling. It is the oldest of the three methods and answers the question “what will we not own?” A health-focused nonprofit might exclude tobacco manufacturers from its reserves so that a donor cannot find the organization funding what its programs work against.
What Is Impact Investing?
Impact investing directs capital toward a specific social or environmental outcome and measures that outcome alongside financial return. It answers the question “what do we want our capital to help accomplish?” It takes two forms, and the difference matters for a reserve portfolio.
True impact investments are usually private and illiquid. A nonprofit serving a single city might place part of its long-term reserves with a community development lender that finances small businesses and affordable housing in that city and receive a report on the loans made alongside the return. Investments like this typically cannot be sold quickly and generally sit outside what a diversified reserve portfolio is built to hold.
A thematic allocation is the public-market form: a small share of the portfolio in publicly traded funds built around a theme, which expresses the same intent but does not measure a specific outcome. A nonprofit might direct part of its fixed income allocation to a green bond fund, which holds publicly traded bonds issued to finance environmental projects, keeping the allocation liquid and inside a diversified portfolio. For most nonprofits and associations, this is the workable form.
Three Methods, Side by Side
| ESG Investing | SRI | Impact (usually via a thematic allocation) | |
|---|---|---|---|
| Core question | How do E, S, and G factors affect the companies we own? | What will we not own? | What do we want our capital to help accomplish? |
| Method | Score and weight companies on ESG criteria | Exclude sectors or companies | Direct capital toward specific outcomes |
| Effect on diversification | Generally keeps broad exposure with different weights | Narrows the investable universe | Concentrates in themes or sectors |
| Typical fit | Organizations that want criteria without hard exclusions | Organizations with a clear conflict to avoid | Foundations and organizations with a specific programmatic goal |
Values-Based and Mission-Aligned Investing: The Umbrella Terms
Values-based investing and mission-aligned investing are not methods of their own. Each is a label for a portfolio that deliberately reflects the organization’s values or purpose, using any of the three methods above.
What Is Values-Based Investing?
Values-based investing is any approach that aligns an organization’s holdings with its stated values, most often through SRI-style exclusions but also through ESG integration or an impact allocation. It is the broadest and most neutral of the labels because it describes the goal without committing the organization to a particular method.
What Is Mission-Aligned Investing?
Mission-aligned investing is the term foundations and institutional consultants most often use for the same idea: a portfolio built so that it reflects the organization’s purpose. A board can use either label in its policy as long as the criteria behind it are specific.
Is Values-Based Investing Consistent with Fiduciary Duty?
For most charitable nonprofits, yes, values-based investing is consistent with fiduciary duty, provided the overall standard of prudence is met. The law that governs how charitable organizations invest names the organization’s mission as a legitimate consideration, and associations are held to a similar standard through their own governing law.
What UPMIFA Permits
The Uniform Prudent Management of Institutional Funds Act (UPMIFA) is the state law that governs how charitable organizations manage and invest the funds they hold, and it has been adopted in virtually every state. It generally requires a board to act in good faith and with the care an ordinarily prudent person would use. It also lists the factors a board should consider when making investment decisions, and one of those factors is the charitable purpose of the organization and of the fund. The law that sets the standard of care for charitable investors names the organization’s mission as a legitimate consideration.
UPMIFA also imposes a duty to diversify, and it requires the board to weigh each investment in the context of the whole portfolio and the organization’s need to preserve capital and make distributions. A values-based approach that leaves the portfolio diversified and consistent with the organization’s return objective generally meets the standard. One that concentrates the portfolio or accepts a materially lower expected return requires the board to be able to explain why.
The above description represents our understanding of UPMIFA and is not representative of legal advice. Boards should confirm the standard that applies to their organization with legal counsel.
How the Standard Applies to Associations
Associations organized under 501(c)(6) are generally outside UPMIFA, which applies to funds held for charitable purposes. Their boards typically fulfill their fiduciary responsibility through state nonprofit corporation law and their own bylaws and policies, and the same reasoning applies in practice. For either kind of organization, a documented decision that keeps the portfolio diversified is the one that generally holds up to scrutiny.
Does Values-Based Investing Affect Performance and Fees?
A portfolio with values-based restrictions does not hold everything the broad market holds, so its returns may differ from the market’s, higher in some periods and lower in others. The more that is excluded, the larger that difference may be. Past performance is not indicative of future results, and no values-based approach should be adopted on the expectation that it will outperform, or rejected on the assumption that it must underperform.
Screened funds and separately managed accounts may carry higher costs than the broadest index funds, and the committee should compare the cost of the screened option to the unscreened option it would otherwise use before deciding whether the difference is worth the alignment.
We recommend deciding up front how much difference from a standard benchmark it is prepared to accept, over what period, and then measure it. Our companion article on writing an ESG investment policy covers how to benchmark and measure that difference.
No values-based approach should be adopted on the expectation that it will outperform, or rejected on the assumption that it must underperform.
ESG vs. SRI vs. Impact: Pros and Cons for Nonprofits
The right approach usually depends on why your organization is considering values-based investing in the first place. A direct conflict between the mission and a holding points to SRI screening, since the goal is to remove a specific conflict. An expectation from donors, members, or staff that the portfolio reflect the organization’s values, without a specific holding to remove, points to ESG integration. A desire to put capital to work toward the mission directly, which is most common among foundations, points to an impact or thematic allocation.
Each method is implemented differently: SRI through exclusionary screening, ESG investing through ESG integration, and impact investing through private impact investments or, more often for nonprofits and associations, a thematic allocation of publicly traded funds. The choice among them also comes down to which trade-off the board is most willing to accept. SRI and ESG integration can be implemented with broadly diversified, cost-efficient funds; a thematic allocation uses public funds but concentrates in a theme, and private impact investments are neither diversified nor liquid.
SRI Investing: Exclusionary Screening
Exclusionary screening removes specific companies, sectors, or industries from the portfolio. It is the most direct method and usually the easiest to explain to a board, a donor, or a member. Its trade-off is that removing companies narrows the investable universe, which reduces diversification somewhat and means the portfolio’s return may differ from its benchmark in either direction because it does not hold everything the benchmark holds. The more industries excluded, the wider that difference may be.
Screening also raises a question of scope that boards should settle up front. Excluding a company from direct holdings is one decision. Excluding indirect exposure through mutual funds and ETFs that hold the company among hundreds of others is a different and more restrictive one, and it usually requires screened funds or a separately managed account, which can raise costs.
ESG Investing: Integration Across the Portfolio
ESG integration keeps broad market exposure and adjusts how much of each company the portfolio holds based on environmental, social, and governance criteria. It appeals to boards that want values reflected without hard exclusions, and it tends to stay closer to the benchmark than screening. Its trade-off is transparency. ESG scores are produced by third-party rating firms, and each firm rates companies differently, so two funds that both carry an ESG label can hold noticeably different portfolios. Before adopting a fund, the committee should know which rating firm’s criteria it uses and whether those criteria match the organization’s values.
Impact Investing: A Thematic Allocation
A thematic allocation directs a defined share of the portfolio into publicly traded funds built around a theme, such as green bonds, and is how most nonprofits and associations that pursue impact investing implement it. Private impact investments, which target and measure a specific outcome, are more common among foundations. The trade-offs are concentration and liquidity. Thematic funds hold fewer sectors than a broad index fund, and private impact investments typically cannot be sold quickly, which makes either a poor fit for reserves that may be needed on short notice. For most nonprofits and associations, an impact allocation belongs, if anywhere, in a defined slice of long-term reserves rather than across the whole portfolio.
How to Choose a Values-Based Investing Approach
It can be helpful for nonprofit and association boards to take four steps before anything is written into policy: build consensus, define the values and the criteria that follow from them, choose the approach and scope, and decide in advance how much difference from the market the board will accept. Values-based investing works best when the decision is made deliberately and then written into the investment policy statement (IPS), the document that governs how your reserves are invested, rather than handled informally with the advisor.
- Build consensus on whether values should inform investment decisions at all. Not every board will agree that the portfolio is the right place to express the mission. A short survey asking each committee member, or each board member if the full board will vote, which approach fits, how strict the screening should be, and which industries concern them shows where consensus exists and where it does not before making a decision.
- Define the values and decide which become criteria. Start with the mission statement and list every value the board might want the portfolio to reflect. That list is usually longer than what belongs in policy, so evaluate each one: does a holding actually contradict it, can it be written in a way an advisor could apply, and is the board willing to accept the cost and diversification effect of enforcing it? The values that pass become criteria, written strictly enough for the investment policy statement (IPS). “We support health” is a value; “we will not hold tobacco manufacturers” is a criterion. For ESG the criterion names the factors that matter and how they should show up in fund selection rather than an exclusion; for an impact allocation it names the outcome.
- Choose the approach and the scope. Decide among SRI screening, ESG integration, or an impact allocation using the trade-offs described above, and decide whether the criteria apply to direct holdings only or to indirect exposure through funds as well, and to the whole portfolio or to a defined pool of long-term reserves.
- Decide in advance how much difference from the market you will accept. A screened portfolio will perform differently from the broad-market index the IPS already uses, sometimes better and sometimes worse. Before adopting restrictions, the board should agree on how large a gap it is comfortable with and over what period it will judge the result, for example over rolling three- to five-year periods rather than a single quarter. Writing that down in advance means the committee evaluates the restrictions against a standard it set, rather than reacting to whichever quarter is in front of it.
Once those four decisions are made, the work moves to drafting the policy language, selecting an ESG benchmark, and setting up quarterly oversight. Our companion article on writing, benchmarking, and monitoring an ESG investment policy covers each of those, including sample policy clauses.
A board that has worked through these four steps has done the work that matters: it has chosen an approach for a reason it can explain, and it has decided how it will know whether the approach is working. If the steps raise concerns or result in uncertainty, it may be worth a conversation with your advisor.
How Raffa Supports Values-Based and ESG Investing
Raffa manages investment portfolios for nonprofits and associations, and values-based and ESG investing is part of that work rather than a separate service. When a board decides its portfolio should reflect its values, Raffa helps define the criteria, build consensus, select an approach, and write the result into the investment policy statement, then builds and manages the portfolio to those criteria and reports on the result each quarter. The principle is the one described throughout this article: the decision belongs to the board, and the advisor’s job is to present the trade-offs, implement the decision consistently with fiduciary standards, and show the committee the effect of its decision.
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About the author
Matt O'Lone
Matt O’Lone is a Portfolio Manager at Raffa Investment Advisers and serves as Relationship Manager and Lead Adviser for nonprofit organizations, associations, and other institutional clients. Through this role, he works closely with boards, finance committees, and staff to help align investment strategy with organizational objectives, risk tolerance, and governance requirements. As an active member in the nonprofit and association community, Matt has participated as a panelist and event host for organizations including the Nonprofit Resource Hub, NoVa Association of Executives, and the Greater Washington Society of CPAs.
Frequently Asked Questions: ESG, SRI, and Values-Based Investing
Can a smaller nonprofit with limited reserves adopt values-based investing?
Yes. Screened and ESG-integrated index funds are generally available at the same investment minimums and at similar costs to their unscreened equivalents, so portfolio size is rarely the obstacle. A smaller organization can keep it simple by starting with a single exclusion applied to its long-term reserves and revisiting the approach at a later policy review.
What is the difference between mission-aligned investing and values-based investing?
Very little in substance. Both describe a portfolio that deliberately reflects the organization’s purpose or values, using any of the three methods described in this article. “Mission-aligned” is the term used most often by foundations and institutional consultants; “values-based” is the more general term. A board can use either in its policy as long as the criteria behind the label are specific.
Does a fund need "ESG" in its name to fit our criteria?
No. Many managers have dropped the ESG label while keeping the same process, and some funds carry the label with criteria that do not match a given organization’s values. Committees should review a fund’s actual screening or scoring methodology against the criteria in their IPS rather than relying on the name.
What does ESG stand for in investing?
ESG stands for environmental, social, and governance, the three categories of criteria used to evaluate a company beyond its financial results. Environmental covers matters such as emissions and resource use, social covers labor practices and community relations, and governance covers board structure, executive pay, and shareholder rights. Rating firms score companies on these factors, and ESG funds use the scores in selecting and weighting holdings.
What is the difference between ESG and SRI?
SRI, or socially responsible investing, excludes companies or industries that conflict with an organization’s values, so it changes what the portfolio owns. ESG investing evaluates companies on environmental, social, and governance criteria and changes how much of each the portfolio holds, without excluding any sector. SRI is a list of what not to own; ESG is a method for weighing what you do own.
Disclosures
Raffa Investment Advisers is a registered investment adviser with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training.
All investments involve risk, including the possible loss of principal. Past performance is not indicative of future results. Indexes are unmanaged and cannot be invested in directly. References to specific indexes are illustrative examples of commonly used benchmarks and are not recommendations. Any forward-looking statements are based on current expectations and are subject to uncertainties.
Values-based, ESG, and impact investing strategies may limit the universe of available investments and may perform differently from the broad market. Third-party ESG ratings and screening methodologies vary and may not reflect an organization’s own criteria. References to specific fund categories or industry data are for illustration and are not recommendations.
This article is for informational purposes only and should not be construed as personalized investment advice. It does not constitute legal or tax advice. Raffa Investment Advisers does not provide legal or tax services. Organizations should consult qualified legal counsel regarding the fiduciary standards that apply to them.
Portions of this article were drafted with the assistance of AI tools and reviewed by Raffa Investment Advisers staff for accuracy and compliance.