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Sustainable and ESG investing terminology
Important information - the value of investments can go down as well as up so you may get back less than you invest. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.
Understanding sustainable and ESG investing
We use the phrase ‘sustainable’ to describe an investment approach that's as concerned with the impact it has on people and the planet, as it is with potential financial returns. Other associated terms you might have heard include socially responsible investing (SRI), ethical investing and environmental, social and governance (ESG) investing. If you’re wondering what some of these mean, you’re not alone. We've pulled together some of the most common jargon in one place, to make it easier to understand.
Common terms to get to grips with
Environmental, social, governance (ESG)
ESG is an acronym for the three central factors used by responsible investors to screen and select companies and other investments for their portfolios. You’ll find that the terms ‘environmental’ and ‘social’ may sometimes be replaced by ‘ethical’ and ‘sustainable’. Using ESG factors does not automatically mean a fund or investment portfolio is ‘sustainable’ or ‘ethical’, so you should always do your research first. Examples of what ESG factors cover vary but they can include climate change, health and safety in the working environment and protecting the interests of shareholders.
Ethical Investing
Choosing investments that avoid dealing with products and services that may be considered harmful or misalign with personal values, such as tobacco, adult entertainment and gambling. Many ethical funds will also screen for a wide range of environmental issues such as deforestation or negative social issues such as low labour standards.
Faith-based investing
Faith-based investments align with the principles of certain religious groups. To create these funds, a negative screening process is used to rule out any issues that could be deemed unsuitable by religious standards (e.g. alcohol and gambling)
Green investing / environmental investing
Investing in companies that either explicitly focus on improving the environment or avoid those that damage it.
Impact investing
Impact investors aim to generate positive, measurable influences on society and/or the environment, alongside a financial return. Some of the areas impact investing might aim to challenge include traditional (ie non-renewable) power generation and gender inequality. Impact investing can be associated with lower financial returns, though this is not always the case. There is some evidence that scoring highly on ESG factors can be associated with better investment returns.
Socially responsible investing (SRI) / responsible investing
This is an alternative term for a range of investment approaches including responsible, sustainable or ethical investing. It usually means that ESG factors and values have been integrated into the investment process. Some examples may include human rights and environmental sustainability.
Sustainability / sustainable investing
An investment approach that considers environmental, social and corporate governance (ESG) factors, with a focus on companies seeking to improve wellbeing and have a positive impact on society and the physical environment.
More terms to get to know
Best in class
An investment approach which focuses on companies that are leaders in meeting sustainable standards. The approach can vary from selecting the best-performing companies to excluding the worst.
Corporate governance
The rules, practices, and processes used to direct and manage a company. The main force influencing corporate governance is a company’s board of directors, although the board can be influenced by shareholders, creditors, customers and suppliers too.
Dark green
Ethical investments are sometimes described as exhibiting various shades of green. Dark green funds put ethical issues at the heart of everything they do. They have a strict process that completely avoids any company or industry that fails to meet environmental or other ethical criteria. The types of industries that dark green funds avoid include, oil, gas, animal testing and tobacco.
ESG integration
A process that considers environmental, social and governance factors together with the typical financial ones. The process allows investments in any business, sector, or region, provided ESG risks are considered.
ESG ratings
A measurable way to gain an understanding of a company’s investment standards and long-term commitment to environmental, social, governance (ESG), and socially responsible investments (SRI). Company ratings can be aggregated to provide an overall score for a fund.
Greenwashing
Greenwashing means giving a false impression that a company’s products and services provide greater environmental (or green) benefits than they really do. It can also refer to the exaggeration of an investment fund’s sustainability criteria.
Light green
These funds are a lot more flexible in their approach to the companies in which they invest. Funds on the lighter green end of the scale recognise that responsible practices but be evident in an industry that is otherwise considered less ethical. Examples include transport companies seeking to reduce carbon emissions, oil and gas companies diversifying into renewable energy or solar panel manufacturers.
Negative screening
A strategy designed to specifically exclude companies based on their involvement in undesirable industries. These may include tobacco, alcohol or armaments.
Positive screening
A strategy designed to specifically filter companies based on their involvement with good ESG practice. Some of these good practices may include promotion of human rights and reduced carbon emissions.
Stewardship
Stewardship describes the process of monitoring and engaging with companies over their strategy, objectives, performance, risk, structure, and corporate governance. The goal is to enhance shareholder value, by helping companies to achieve their potential while also delivering benefits to society and the environment.
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