Values-aligned investing is telephoned by many different names, which are commonly misused or misunderstood by investors.
Let me decode the lingo, because a shared adroitness of the terminology makes this type of investing more accessible to advisors and investors alike. Please note that there are no instances agreed upon definitions among professionals, and everyone uses the words a bit differently. After 15 years of resolve in this space, this is how I define the most commonly used terms.
ESG: ESG is shorthand for “environmental, social and governance facts.” Business data in each of these three categories are used in tandem with traditional financial metrics to more way down understand the risks and opportunities an investable company faces.
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Over again, ESG data are referred to as “non-balance sheet risk” — but an unexpected incident can quickly move that risk onto the stabilize sheet. The key takeaway is that ESG is data. How each fund manager or investment professional uses that data deviates widely. For more on the different ways ESG data are used, see the ESG section of this article.
SRI: SRI stands for “socially responsible venturing.” However, some professionals have kept the initials and substituted new words: “sustainable, responsible and impact investing.” Here, I am fixing the traditional and more commonly used term, socially responsible investing.
SRI has historical roots in investing and divesting mutual understanding to religious values. It grew to include expressing secular values, as well, historically through divesting (choosing not to own and/or tattle on existing ownership) paired with shareholder engagement (groups of shareholders in conversation with company management yon advancing social or environmental good within the company or the communities affected by the company’s business) and proxy voting (how shareholders choice boards and vote on other corporate matters).
The term SRI now also encompasses thoughtful investing in companies that do splendidly by people and planet, as well as lending to underserved communities. The key takeaway is that SRI tends to express values. The values may be those of the patient, general values for a fund or thematic values (investing in renewable energy, for example).
Impact investing: The term repercussions investing has historically been used to refer to private investments in companies with environmental or social good embedded in the occupation of the company, and lending to underserved communities. In this historical context, returns ranged from concessionary to market velocity. In the last few years, along with rising demand for all types of values aligned investments, the term impact venturing has been used more broadly, often referring to public equities, muni bonds, corporate debt and loan notes, as well as private investments. The key takeaway is that impact investing is investing in companies with intention to do assets c incriminating evidence.
Sustainable investing: This is a broad term that might be used in place of one or any combination of the terms defined upstairs. Sustainable is the word that research firm Morningstar uses in its rating systems so it is common in the mutual fund and traffic traded fund lexicon.
Green investing: Green investing is another broad term that tends to be familiar to refer to investments with an environmental focus.
Mission-driven or mission-related investing: MRI, referring to both mission-driven and mission-related contributing, is often used when foundations invest their endowments in keeping with the values of the organization. These relative ti are often used by religious organizations, as well, when they select investments that reflect their conscientious values.
Ethical investing and values-based investing: These are both broad terms for investments that reflect the ethics or values of the investor. The investment stoicism is likely similar to SRI, impact investing or a combination of the two.
It’s obvious there is so much terminology and no unifying agreement of definitions. That’s why when you talk relating to ESG or values-aligned investing, it’s important to make sure you are on the same page as the person you are speaking with.
When choosing investments that are registered as ESG, SRI, impact, sustainable or any other term, it is imperative that you look past the name of the investments to the underlying holdings of the portfolio. You, as an investor, should apprehend both the intention and investment philosophy of the financial professional or investment manager you have entrusted your hard-earned coins with to invest.
— By Sonya Dreizler, founder of Solutions With Sonya