Impact Investing, Socially Responsible Investing, Conscious Investing, Sustainable Investing, Ethical Investing, ESG Investing – Guiding Through the Maze of Terminology
Vienna, July 27, 2018 - There are many different terms out there to describe a concept of investing that is value-based, rather than just profit-oriented, however, the abundance of terms and definitions also means that investors, especially those that have so far largely invested traditionally may well get confused. And indeed, there are overlaps, but also significant differences.
In general, the crucial questions investors are faced with are: Do I simply want to avoid investments into companies whose business activities have a negative impact on the environment or society, or do I seek to invest in companies whose activities are geared towards generating a positive impact, environmentally or socially? And which kind of positive impact am I looking for? Where do my personal values and preferences come in? And which role does profit play?
Let’s take a look at the different terms and how they are commonly defined.
ESG – Environment, Social and Governance Investing
ESG refers to a set of standards for a company's business conduct and operations. These are standardized criteria that help investors filter out companies whose business practices are not compatible with ESG standards. Socially conscious investors can use these criteria as a way of measuring or screening potential investments.
What constitutes an acceptable set of ESG criteria is subjective, so investors will need to do the research to find investments that match their own values.
Below is a list of common ESG factors for consideration. Investments with good ESG scores have the potential to generate returns, while those with poor ESG scores may inhibit returns.
- Energy consumption
- Human rights
- Quality of management
- Child and forced labor
- Board independence
- Climate change
- Community engagement
- Conflicts of interest
- Waste production
- Health and safety
- Executive compensation
- Natural resource preservation
- Stakeholder relations
- Transparency & disclosure
- Animal welfare
- Employee relations
- Shareholder rights
Socially Responsible Investing – SRI
Socially responsible investing goes one step further than ESG by actively eliminating or selecting investments according to specific ethical guidelines. The underlying motive could be religion, personal values or political beliefs. Unlike ESG analysis which shapes valuations, SRI uses ESG factors to apply negative or positive screens on investment options. For example, an investor may wish to avoid putting their money into companies engaged in weapons production because this would collide with the investor’s anti-conflict beliefs. Alternatively, an investor may opt to allocate a fixed portion of his/her portfolio to companies that contribute to charitable causes.
Other negative SRI screens include:
- Alcohol, tobacco and other addictive substances
- Production of weapons and defense tools
- Terrorism affiliations
- Human rights and labor violations
- Environmental damage
For clients engaged in socially responsible investing, making a profit is important, but must be balanced against principles. The goal is to generate returns without violating one’s social conscience.
Impact investing is investing that aims to generate specific beneficial social or environmental effects in addition to financial gain. Impact investing has grown out of socially responsible investment, but goes one step further. While socially responsible investing encompasses avoidance of harm, impact investing actively seeks to bring about positive impact. Impact investment portfolios could, for instance, include non-profits that benefit the community or clean technology enterprises.
In impact or thematic investing, positive outcomes are of the utmost importance - meaning the investments need to have a positive impact, in some way. So the objective of impact investing is to help a business or organization accomplish specific goals that are beneficial to society or the environment. Investing in a non-profit dedicated to the research and development of clean energy, regardless of whether success is guaranteed, is an example.
For related reading, see:
Impact Investing: Making a Difference and a Profit
Conscious investing goes one step further than impact investing by bringing a systemic, more “conscious” perspective into play. With regard to the investor, conscious investing is both a state of awareness as well as a holistic form of impactful investing where personal moral and spiritual values are integrated into the investment approach.
For related reading, see:
Ethical investing is closely related to both SRI and impact and investing in that it aims for a way of earning investment returns by supporting companies that are creating positive change in the world, or, in some cases, that aren't creating positive change; but aren't making the world worse, either. Ethical investors want to reach their financial goals in ways that coincide with their values.
Sustainable Investing is an investment philosophy that resembles impact investing in that it takes into account environmental, social as well as financial criteria.
It's All About Choices – and Compromises
The problem with these definitions is not just that they are in many cases rather vague, but also that the ultimate decision of what makes up a good investment and what does not hinge to a large extent on the individual preferences of the individual investors. Even when investors select an investment model that is aligned with clearly defined criteria, for instance the UN Sustainable Development Goals (SDGs), they may still face a situation where it is difficult to square their investments with all of their personal values and preferences. This could be the case, for instance, when a particular investment portfolio includes a company that, while priding itself on high standards regarding gender equality and fair work conditions, is found to be lagging behind on the use of environmentally-friendly technologies. In the end, the question investor have to ask themselves is always: Which trade-offs and compromises can I live with and where do I draw the line?
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