Responsible Investing, Part 1: 6 Terms to Know

This post is Part 1 in a series on Responsible Investing, which we are focusing on for the month of September. In this series, we’ll break down the basics and help you learn about socially and environmentally responsible investments and how you can take part — no matter your experience level or how much you have to invest.

Many of our clients are eager to start investing, but they want to know how their investments might have a positive or negative impact, and they want to have a choice in what companies or sectors they invest in and support.

One of the most popular topics and promising new directions in the investment space is the growth of Socially Responsible, Sustainable, Values-aligned, Mission-aligned, Thematic, Impact, Triple Bottom Line, or ESG investing. Are those enough terms for you? There are even more! But before we get too in the weeds, all of those terms are different, and not necessarily straightforward. What is the difference between investing with impact or investing in an SRI or ESG fund? The alphabet soup of acronyms, which are too often used interchangeably, can be incredibly confusing. In this series. I’ll be using the term Responsible Investing as a catch-all to refer to all the strategies under this general umbrella.

The first thing to know about investing in a sustainable or socially responsible manner is that not all responsible investment opportunities are created equal, and that there are many different strategies available to each investor.

To start, let’s outline a few basic terms: 

SRI stands for Socially Responsible Investing, but is often used in a much broader context to represent responsible or impact-focused investing as a whole. SRI is a strategy that excludes particular companies, or sectors, from an investment fund or portfolio. An example of this would be a fund that does not invest in weapons manufacturers, tobacco companies, or beauty companies that test products on animals. This limitation of what is included in the fund based on industry or practice is called a negative screen. It screens out particular investment opportunities from a fund or portfolio. They do not otherwise require companies to meet any particular criteria.

ESG stands for Environmental, Social, and Governance. ESG is a strategy that limits investments to companies that meet particular criteria related to environmental practices (the E), employee, customer and community relations, and supply chain practices (the S), or corporate governance practices (the G). This requirement for being included in the fund is called a positive screen. In other words, companies must meet these criteria to be included in a fund or portfolio. The purpose of ESG is not necessarily to remove companies from consideration based on any moral code, mission, or value base, or even specifically to create impact. The goal of ESG is to reduce exposure to investment risk across those three categories. That process can have an impact, but it's not the primary or only investment goal. In addition, there is no one universally accepted framework for evaluating ESG criteria, so each fund may have different criteria or weigh ESG data differently.

Thematic Investing refers to investing in particular industries, trends, or themes.  Thematic investing is focused on a trend or change that an investor sees or wishes to see in the market, which may or may not have an impact or socially or environmentally sustainable focus. This strategy can be used to achieve a particular goal, such as increasing access to and use of sustainable energy, or improving public health outcomes by investing in a variety of different types of companies working towards solutions in that sector, from new technologies to products and services that serve a broader customer base or disrupt existing models. Thematic investing can be a good alternative for investors who want a more targeted approach or who are uncomfortable with certain companies or sectors being included in an ESG or SRI fund, but it can come with additional risk due to the lack of diversification. 

Mission-aligned or values-aligned investing refers to investing within a clear mission or set of values. A mission-aligned, or values-aligned, investment could fall into a number of the other strategies outlined in this post. Any investor can have a mission or set of values that direct what they will or will not invest in. What’s important in this case is having a very clear definition of the mission or set of values and how that focuses or limits what investments are included in a fund or portfolio. An example of this might be a faith-based investing strategy, such as Halal Investing. Halal Investing is investing in accordance with Islamic principles, which could mean not investing in companies that produce or sell alcohol, or not investing in anything where the investor receives interest.

 Impact Investing means investing in companies that create either social OR environmental impact AND provide financial return. Impact investing is a strategy that looks for a quantifiable impact on a social or environmental challenge. For example, an impact investment fund might include investing in a renewable energy company that tracks how much they have reduced carbon emissions by offering their product to customers. Investors who do impact investing require companies to measure and report on their impact as well as their financial returns. Impact investment funds often focus on a few sectors, and while many impact investment funds return market-rate financial returns, some funds are more impact-focused and will sacrifice market-level returns for additional impact. 

Triple Bottom Line Investing (TBL), or People, Planet, Profit is a strategy of investing in companies that create social impact AND environmental impact AND provide financial return. Triple Bottom Line investing is a strategy that looks for a quantifiable social and environmental impact. For example, a TBL fund might include a company that hires formerly incarcerated people who grow and sell organic vegetables. TBL investing requires companies to measure and report their social and environmental impact as well as their financial returns to investors. Like general impact investments, TBL funds often focus on a few sectors, and while many funds return market-rate financial returns, some funds are more impact-focused and will sacrifice market-level returns for additional impact. 

Now you’ve got your roadmap for sifting through the terms we’ll be discussing this month, as we focus on taking a deep dive into Responsible Investing. Stay tuned for next week’s post on how to get started investing responsibly.