CHALLENGES AND OPPORTUNITIES OF ENVIRONMENTAL, SOCIAL, AND GOVERNANCE (ESG) INVESTING

The application of environmental, social and governance (ESG) investing criteria began in the 1960s, first as socially responsible investing. Socially responsible investing (SRI) involves the inclusion of non-financial investment goals, encouraging social responsibility and positive social impact. Environmental, social and governance (ESG) investing considers how these three factors affect the performance of an investment and an investor's returns. Social inequalities, climate changes, pollution, the harmful effects of certain activities and products on health, the need for responsible and sustainable corporate governance are some of the reasons why socially responsible investing (SRI) and environmental, social and governance (ESG) investing are rapidly growing investment classes or investment strategies. Although sometimes considered synonymous, they are different classes of investment. Investors apply environmental, social and governance (ESG) factors or non-financial factors as part of their fundamental analysis to identify risks and growth opportunities of potential investment. Increasing interest in environmental, social and governance (ESG) investing or "sustainable investing" can be seen in the last several years. "In the US, net flows into sustainable funds reached $20.6 billion in 2019, more than four times the previous annual record which was set in 2018". The paper investigates similarities and differences of environmental, social and governance (ESG) investing and socially responsible investing (SRI). The aim of this paper is to provide a better understanding of the concepts and strategies of these two different classes of investment. Although socially responsible investing (SRI) is considered an outdated concept compared to the application of environmental, social and governance (ESG) investment criteria, preliminary results of the performance analysis of selected Exchange traded funds (ETFs) applying separate strategies showed that Exchange traded funds with SRI strategy performed better. The EU's mandatory Sustainable Finance Disclosure Regulation (SFDR), among other, puts additional mark on sustainability in financial industry, pushing niche strategy into a widely accepted investment approach. The paper will contribute to the existing modest Croatian literature in this area.