ESG Investing: Understanding the Jargon

Have you considered investing in a way that reflects your values, but have been baffled by the jargon? Are you bewildered about what is meant by ESG investing? And perplexed by the difference between that and SRI? If so, you’re not alone in being confused by the acronyms and phrases used to describe investments that consider other factors alongside financial ones. Read on for a handy ESG investing jargon buster for some of the key phrases you may want to know.

Investing with a purpose is becoming more popular. As our awareness of sustainability and the impact our decisions have on communities and the world has changed areas of our life like shopping and energy use, it’s inevitable that considering the effects of investment decisions has become more mainstream too.

It’s something that governments, businesses, and institutional investors are considering more and more. And there’s growing demand from individual investors to understand how their money is invested. According to research from Triodos Bank, 71% of investors want more knowledge and transparency about where their money is invested.

If you’re interested in investing in a way that reflects your values, coming to terms with the jargon used can be challenging. “ESG investing” is a catch-all term, but we can dig deeper within that.

ESG Investing: Knowing your ESG from your SRI

When you look at investments that are deemed “ethical”, they can be described in many different ways. While they may seem interchangeable, there are subtle differences that may affect which investments are right for you. Below are some of the common terms used.

• ESG: ESG stands for “environmental, social, and governance” and is one of the most-used terms when investors look at a business’s practices. As the acronym suggests, environmental concerns, issues affecting people and communities, and how a business is run may all be considered when making an ESG investment.
• Environmental and green investing: Investments that use the phrases “green” or “environmental” will focus on the effect businesses are having on the environment. This may be the effect on climate change, environmental degradation, or water pollution.
• Impact investing: Impact investing can cover many areas, from renewable energy to improving healthcare access in communities. Where it differs from the above is that it seeks to have a measurable impact alongside generating a profit.
• Socially responsible investing (SRI): SRI takes a wider look at how companies are operating and whether it’s in a “responsible” manner. This complements more businesses publishing corporate social responsibility (CSR) reports that document the company’s impact on environments and communities.
• Thematic investing: A thematic approach focuses on one specific area. For example, you may find that an investment fund is focused on sustainable healthcare or sustainable energy. If you do invest in a thematic fund, remember the importance of diversifying your investments when you look at your portfolio as a whole.
• Faith-based investing: There are also faith-linked investment opportunities. For instance, Sharia law investments will not invest in alcohol, tobacco or gambling as these do not align with the teachings of Islam. There are other examples of faith-based investing too, and you don’t necessarily have to be a member of the religion to invest through these.

When reviewing investments that use the above phrases, keep in mind that there is currently no standardised reporting method for funds or investments that use these terms. So, while a fund may describe itself as “green” you should still carry out your own research to ensure it aligns with your goals.

3 ESG investing strategies and what they mean

So, what happens when you’ve understood the jargon? Well, if you want to consider factors other than returns when investing, there are three main ways of doing so.

1. Positive screening

Positive screening is where you actively invest a portion of your investment portfolio into businesses or projects that align with your views. So, if you want to support renewable energy, you may allocate some of your investment to wind farms or to firms developing new technology in this space. Or you might want to look at a fund that only invests into companies scoring highly on ESG factors.

2. Negative screening

With negative screening, you would avoid certain investments that don’t align with your values. Using the above example, if climate change is a concern, you may choose to avoid investing in companies that operate within the fossil fuel industry. Or you might instruct your stockbroker to avoid any companies that test beauty products on animals. Ultimately, you’re choosing not to invest in certain places because of their practices.

3. Responsible (or active) ownership

When you invest in a company, you can also engage with it to encourage better working practices. This is where your shareholder power could be exercised. For this method to work, you must either work with other shareholders or hold a significant share of the business. As a result, this method is usually reserved for large investors, such as pension funds. We previously published a blog post all about active ownership and its benefits – you can find the post here.

Helping you untangle investment jargon

We hope this guide has helped to increase your understanding of the jargon surrounding ESG investing. Obviously, it’s only a starting point. There would be a lot more involved in selecting the right ESG investments for you. That’s where we would come in.

If you’re interested in ESG investing or you’d like to make changes to the way you invest, we’re here. We’ll help you understand what your options are and the potential returns, minus the jargon. We’ll also ensure that any investments align with your overall financial needs and requirements, including your attitudes to risk and capacity for loss. To discuss ESG investing, or anything related to financial planning, contact us today.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.