Impact investing • 2 min read
You have probably heard many different terms used to describe sustainable investing. Often it can just sound like jargon buzzwords and it can be difficult to pick out the differences between them (if there are any at all).
The reality is that some of the terms used do have a specific meaning whilst others are generic terms used to describe multiple types of investing.
Here is our take on some of the key terms:
Socially Responsible Investing (SRI) is a form of investing that takes into account an investor’s moral principles. This generally involves excluding companies involved in activities such as weapons manufacturing, tobacco or adult entertainment. This approach tends to exclude the worst companies, but may not feature some of the most sustainable ones.
ESG investors go a step further than SRI. They consider how environmental, social and governance risks and opportunities will influence the future performance of a company. They look to invest in well-run businesses whilst avoiding big ESG risks (such as fossil fuels and palm oil) and typically engage company management on the three elements to ensure continual improvement.
However many businesses which may seem to be un-ESG can also feature in these portfolios. For example, you can find energy companies, fast food and even fast fashion. Often, they are included because they have met criteria such as having at least 30% of women on the board or because they have some employee benefits.
Whilst impact investors are also concerned about ESG risks, their main focus is on supporting companies that are having a positive impact on the world rather than just avoiding those that have a negative impact.
One of the most important characteristics is that the change must be measurable. So, for example, an impact company in waste management could measure the amount of waste going to landfill and record how much they reduce it each year. The improvements must be tangible and clear to investors, otherwise it could be a fake impact investment - known as “impact washing”.
There are plenty of other terms that you may also hear like green investing, sustainable investing or ethical investing. Some of these (especially ethical investing) tend to have religious elements, such as Islamic or Christian principles which may not be what you are looking for.
Generally, green and sustainable investing are terms that suggest that some form of environmental or social factors are taken into consideration and fit somewhere on the scale between impact and SRI but you may need to read up a bit on the fund in question to understand exactly how they do it.