“Comply or Explain” and the Methodological Dilemma Between SRI and ESG: Transitional Terminology

This chapter examines the development of Socially Responsible Investment (SRI) and its relationship to ESG investing, focusing on how ethical screening and market-based accountability have shaped modern sustainable finance. SRI traditionally uses negative screening to exclude industries such as alcohol, tobacco, gambling, weapons, nuclear energy, and GMOs based on ethical and environmental concerns. ESG, in contrast, emphasizes transparency, disclosure, and the “Comply or Explain” principle introduced by the UK Cadbury Report, allowing firms to justify deviations from governance standards. The chapter traces the historical foundations of SRI from Sharia-compliant finance and Methodist ethical investing to the creation of major sustainability indices such as the DJSI and FTSE4Good. It compares the performance of SRI and ESG using DJSI, FTSE4Good, and the MSCI World Index, applying Z-score standardization to evaluate differences between negative and positive screening. In addition, text-mining (LDA) analysis of German automakers’ annual reports is presented to show how EV adoption and national energy policies influence corporate disclosure and governance priorities. A review of global sustainable investment trends highlights that, while Europe and Japan have expanded their sustainable assets, the recent decline in US figures reflects stricter ESG definitions and efforts to eliminate greenwashing rather than a retreat from sustainability. Finally, the chapter concludes that addressing greenwashing in ESG investing requires clearer investment concepts and the use of new technologies.