Sustainable and ESG investing terminology

Sustainable investing is investing your money with an awareness of its wider impact. It’s often referred to as ESG investing, which stands for environmental, social and governance investing. It is where an investor considers these three factors in their investment decisions with the goal of promoting a positive impact, as well as the potential long-term financial return.

Environmental
Considers the impact the company, or fund, has on the environment. For example, carbon footprints, deforestation, resource repletion (including water) and pollution.

Social
Considers the involvement and position of the company, or investment fund, on social issues such as working conditions (including slavery and child labour), health and safety of employees, employee diversity and engagement with the local communities (including indigenous communities).

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.

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.

Ethical investing (also known as value-driven) refers to investing in line with certain principles, usually using negative screening (exclusions) to avoid investing in companies whose products and services may be considered harmful or misalign with personal values, such as tobacco, adult entertainment and gambling. 

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).

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 (i.e. non-renewable) power generation and gender inequality. Impact investing can be associated with lower financial returns, though this is not always the case.

Green investments aim to support business practices where they have a positive impact on the environment. This can be achieved by investing in companies that either explicitly focus on improving the environment, by conservation of natural resources, or avoid those companies that damage it. At times, green investing, can also be Impact investing.

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.

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.

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).

Funds can also have an ESG rating. However, this is separate from a company rating. Fund ratings can be calculated in different ways, by different ESG rating providers. One way they can be calculated is aggregating company ratings (as funds can invest in multiple companies) to provide an overall score for a fund. They could also be calculated by focusing on the fund’s engagement, ESG execution and public advocacy. Fund Ratings aim to provide greater transparency and understanding of ESG characteristics.

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.

A strategy designed to specifically exclude companies based on their involvement in undesirable industries. These may include tobacco, alcohol or armaments.

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 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.