Responsible investing considers social and environmental good alongside an investment’s financial return. It is an umbrella term, which covers a variety of approaches.
But, what does all the different terminology mean?
Is responsible investing the same as ethical investing? And what is sustainable investing? We have put together some frequently asked questions about the different terminology means to give you the answers.
Environmental, social and governance (or ESG), are non-financial considerations that inform investment decisions based on an assessment of the risks these factors pose to your investments. ESG is not just about what a company manufactures or sells but how it goes about it.
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Ethical investing focuses on avoiding investing in companies involved in areas deemed harmful or contradictory to particular beliefs. Ethical investing is typically applied by excluding investments by sectors, countries and activities. This can include weapons, gambling, tobacco and coal mining. This is sometimes also referred to as ‘negative screening’ or ‘exclusion’. Certain investments might also be excluded for not complying with international standards of conduct, for example, the UN Human Rights Declaration.
Because there can be different views as to what constitutes harmful activity, it is always important to read the fund or portfolio literature so that you understand the basis on which your investment will be managed.
A sustainable investment strategy takes a long-term view aiming to generate investment returns while fulfilling certain sustainability (often ESG) criteria and/or delivering on specific and measurable positive sustainability outcomes. Investments are chosen on the basis of their economic activities (what they produce or what service they deliver) and on their business conduct (how they deliver their products and services). More broadly, sustainability means meeting the needs of the present without compromising the needs of future generations.
Negative screening is avoiding investing in companies engaged in what are perceived to be harmful activities, such as tobacco, gambling or manufacturing weapons. Negative screening, or ‘exclusion’, is how many values-based ethical funds operate.
Rather than avoiding investment in certain areas, Positive Screening assesses each sector for opportunities. Comparing to the industry peer group, looking for ‘best-in-class’ companies in which to invest, favouring those they believe contribute more positively to society or the environment. This implies that no particular area or sector is explicitly excluded, unless combined with ‘negative screening’, and ‘best in class’ companies in any sector may be considered. Certain investments focusing on a particular theme, such as clean energy or climate change solutions, may also use this broad approach.
You should always read the fund or portfolio literature to understand the basis on which your investment will be managed.
A term used to describe a company leading in its sector in terms of it ESG credentials, relative to its peers. Unlike a ‘negative screening’ approach, Best-in-Class would not be looking to exclude all companies in a particular sector. An example would include investing in the most energy efficient/lowest carbon energy producer.
Green investing typically means backing companies contributing to better environmental practices in areas including renewable energy, energy efficiency, clean technology, low-carbon transportation infrastructure, water treatment and resource efficiency.
Organisations accused of ‘greenwashing’ are those that, for marketing purposes, present themselves or their products as more focused or impactful on environmental or sustainability issues than they really are.
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