ESG investing: Understanding the jargon when making investment decisions

Chris Broome – Chartered Financial Planner

Have you considered investing in a way that reflects your values, but have been baffled by the jargon? 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. Here’s a jargon buster for some of the key phrases you need 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, one of the challenges can be coming to terms with the jargon used.

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 investment opportunities that are linked to faiths. 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 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 investment strategies and what they mean

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.

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.

3.  Responsible ownership

When you invest in a company, you can also engage with it to encourage better working practices by using your shareholder power. 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.

Helping you untangle investment jargon

If you’d like to make changes to the way you invest, we’re here to offer support. We’ll help you understand what your options are and the potential returns, minus the jargon. Please contact us to arrange a meeting today.

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

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.