The A-to-Z of ESG Investing

Understanding the terminology behind environmental, social and governance investing.

A little over ten years ago, there was a renewed focus on addressing global environmental, social and governance (ESG) challenges through investment. Though these priorities have been considered by investors for years, the term ESG gained most of its traction over the past decade. The goal of ESG is to call attention to the risks and opportunities present in the operations of every industry within the global economy.

Broadly speaking, ESG stands for:

• Environmental factors, including energy sources and use, animal treatment, conservation objectives, emissions and more

• Social factors, such as how an operating entity interacts with its surrounding community, its supply chain and its workforce

• Governance, including the oversight, guidance and leadership of an operation, from advisory board composition and financial stewardship to corporate by-laws and more

If you were among the pioneers in this area, you have witnessed the growth of an expanding network that has enabled you to increasingly participate in this evolving marketplace. With that expansion, a lexicon of new and related terminology has emerged that may require some definition. Below, we attempt to demystify some of the lingo that is foundational to ESG investing.

Prominent ESG investing styles

Impact investing — Making a measureable difference

Impact has come to mean many things to different investors. The Global Impact Investing Network (GIIN) defines impact investments as those made into companies, organizations and funds that intend to generate measurable social and environmental impact alongside a financial return. A different interpretation holds that allocating capital in any way to affect positive change around ESG concerns is an impact investment.

Socially responsible investing (SRI) — Evolving beyond social issues

Socially responsible investment is believed to have origins in the 1960s and 1970s, as communities took a greater interest in the health and safety of goods being consumed. Subsequently, certain investors began demanding greater transparency and corrective action by corporations and government policymakers. Though it might be inferred that the term mainly relates to social matters, it has evolved to include broad ESG considerations. In fact, some investors have rebranded the SRI acronym to stand for sustainable, responsible and impact.

Shareholder engagement — Influencing change through participation

Shareholder engagement is the practice of making equity investments in a company in order to become a partial owner and influence the company’s leadership to make changes, in this case related to ESG matters. There are many styles to this investment approach:

• Friendly activism, where you collaborate with company management to affect positive ESG change

• Proxy voting

• Shareholder resolutions

• Direct negotiation with management around central topics

Shareholder engagement may also occur at the public level, where government policymakers are engaged to enact regulatory change around ESG matters.

The examples of four ESG-focused organizations

Putting ESG investing to work in your portfolio

How can you find companies, mutual funds and exchange-traded funds that support an ESG investing approach? One way is to check the sustainability ratings based on research conducted by Morningstar |Sustainalytics.

You’ll find the ratings on many mutual fund and ETF reports from Morningstar as well as on 2,000+ companies through Yahoo Finance. The ratings can help you evaluate how well companies are managing ESG factors and find sustainable funds.

What started as socially responsible investing decades ago has evolved into a global movement of investors seeking to make measurable change by the ways in which they direct capital. A consequence of this evolution is a need for a common understanding of the rapidly expanding terminology that relates to ESG. With proper definition around these terms, investors will have increased confidence to grow and scale ESG globally, and perhaps redefine investing altogether.

For additional information on incorporating ESG investing into your portfolio, speak with your financial professional.