Sustainable investing, SRI, ESG, green funds… the jargon used to describe the concept of investing using ethical and sustainability considerations continues to grow, and with it so does the confusion around the topic.
Experts themselves often struggle to provide clear definitions and terms are used interchangeably, making this area a minefield for investors.
Lee Qian, one of the managers of the £45m Baillie Gifford Positive Change fund, said: “The whole area is full of jargon. Different people use different labels and it is extremely confusing for the person on the street.”
Ian Simm, founder and chief executive of Impax Asset Management, added: “We try to avoid labels. The trouble with saying we do ESG is that pension fund manager will say ‘We like what you do, but we do not have an allocation to ESG’. We are mainly a global equities manager with an investment philosophy that is informed by a transition to a more sustainable economy.”
One of the most widely used classifications of the different types of sustainable investing was developed by the Global Sustainable Investment Alliance (GSIA), first published in its Global Sustainable Investment Review 2012. This methodology divides the area into seven key definitions:
- negative/exclusionary screening
- positive/best-inclass screening
- norms-based screening
- ESG integration
- sustainability themed investing
- impact/community investing
- corporate engagement and shareholder action
Let us examine each of these in turn.
Negative and positive screening
The two simplest forms of sustainable investing according to that classification are negative/exclusion screening and positive/best-inclass screening.
Negative screening is the exclusion of certain sectors, companies or practices from a fund for not meeting specific ESG criteria. An example would be avoiding investment in the tobacco industry. One aspect of this is faith-based investing, which avoids investments in companies whose business activities are viewed as violating the teachings of a given faith.
Positive screening, on the other hand, is investment in sectors, companies or projects selected for positive ESG performance relative to industry peers, such as investing in clean energy.
This is where a manager screens investments according to their compliance with international norms and standards, such as the UN Principles of Responsible Investing (UN PRI).
Environmental, Social and Governance (ESG) is one of the most widely used terms in the industry. GSIA describes it as the “systematic and explicit inclusion by investment managers of environmental, social and governance factors into financial analysis”.