Investment terminology can be a mouthful at the best of times. Enter then the world of sustainable investing with its acronyms and ambiguous phrases and it quickly takes on the consistency of alphabet spaghetti.
At risk of upsetting the purists, there are some key terms that investors new to the scene might find worth trying to understand. A few are listed below:
“Sustainability” is the cover-all description for a range of activities combining investment for return with attention to societal outcomes. The term derives from assumed longevity and success afforded to company business models that are based around consideration for the environment and broader stakeholders – employees, communities, consumers and suppliers – alongside the raw profitability available to shareholders.
Sustainability is the term is most favoured by global investment firms and nowadays many mutual funds are attributed sustainability ratings.
“Socially Responsible Investing /SRI” and “Responsible Investing / RI” all have similar meanings and are often used interchangeably with Sustainability. However, SRI or RI is most applicable when referring to investments in conventional investments. It assumes selection to accentuate certain underlying attributes within those companies often based around a qualitative assessment of what they do and how they do it.
In essence it is about identifying and taking a subjective view on elements good and bad corporate behaviours across industries and geographies in choosing their investments.
“Ethical Investing” for all its possible connotations (as few admit to investing unethically) is a term more often used to describe the practice of exclusion of certain sensitive industrial sectors – often tobacco and armaments manufacturing – in their entirety. This is also known as negative screening.
Often Ethical Investing is considered an outdated and narrow approach, although the practice of exclusion is still widely used as a component of SRI.
“Divestment” – although simple to understand as the selling down and excluding certain sector or types of company, the term has been appropriated to define the movement to exclude fossil fuel related companies specifically, and popular within university endowments.
“Environmental, Social & Governance / ESG” is the current investment management industry framework for quantitative assessment of corporate behaviours across all industrial sectors. This approach allows for comparative analysis of companies using a relative scale to establish rankings based on multiple underlying data points. Companies are scored on attributes such as the environmental policies they have in place, the number and severity of labour rights abuses within their supply chain and the number of women appointed as board level directors.
Typically, ESG data is supplied at a cost to investment managers by specialist evaluation agencies and/or mainstream market data providers. It allows managers to build investment portfolios with positive bias (positive screening) towards companies displaying higher relative scores, or E-S-G factors, and to exclude companies with lower scores.
“Impact” is as pervasive a term as it is problematic to give precise meaning. The term is widely used in both general and specific circumstances to imply some societal benefit. Increasingly managers will seek to quantify positive influences because of their investment, which is often harder with quoted companies or when using ESG scales. Measuring impact is often also a key issue for charitable schemes run on a philanthropic basis. So, both approaches will seek to use metrics such as the number of disadvantaged individuals assisted, the number of trees planted, or metric tonnes of pollutants mitigated, for a given dollar of investment or funding.
Often impact investment programmes derive from a charitable purpose and are fulfilled by a non-profit agency or operating within for-profit financial frameworks, say a registered charity raising debt or social enterprise issuing equity. Impact investors may be motivated as much by the social benefit to a specific cause, as by the financial return.
“Carbon Intensity” is one most tangible form of impact. Specific to the ‘E’ of ESG, it seeks to quantify the output of CO2 emissions by companies across sectors on a comparative scale.
“The Circular Economy” is another environmentally focused term. It relates to the recycling of waste products for other usages. This might involve the combustion of waste materials for energy, the filtration of waste water or processing of consumer waste products into raw materials for other industrial purposes – such as turning plastics into fabrics or road coatings.
“Social Impact Investment” usually implies a tri-partite scheme of impact investing involving a sponsoring statutory agent – usually a government department, international development agency or local authority – acting as paymaster to reward third party investors that fund specialist agencies to provide charitable services. The financial return back to the original investors is usually based on performance outcomes delivered by the agency, the quantified social impact. These are complicated schemes to establish, often limited in scale, and frequently eligible only to professional investors. Sometimes these investments are called ‘Social Impact Bonds’, although rarely are they structured as conventional bonds.
“Sustainability Development Goals / SDGs” – succeeding the Millennial Development Goals these are the 17 thematic objectives of the United Nations for delivery by 2030. They give impetus to government policy, regulatory directives and agency priorities across a broad range of developing world issues such as reducing poverty, improving female education and protecting the marine environment.
While critically important in societal terms, it is quite difficult to map the SDG’s to investments since they do not transpose to standardised accounting measures and corporate activities; although many attempts are underway.
This glossary illustrates there is huge overlap in meaning and that many different agents give voice to the sustainable investing chorus; supranational and government agencies, non-profits and social enterprises, regulators, investment managers, index providers, data providers and a myriad of institutional and retail investors all contribute to the scene’s momentum and development.
Given these varying perspectives it is no wonder that sustainable investing terminology can be confusing and even nebulous.
But in encouraging all to learn this new language, does it matter if there is occasional confusion as investment decisions and societal outcomes become increasingly aligned?
Investment terminology can be a mouthful at the best of times. Enter then the world of sustainable investing with its acronyms and ambiguous phrases and it quickly takes on the consistency of alphabet spaghetti.