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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.
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.
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.
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United Nations Sustainable Development Goals (U.N. SDGs) — Setting specific targets with global benefits In 2017, the United Nations unveiled 17 sustainable development goals. The U.N. defines these SDGs as a universal call to action to end poverty, protect the planet and ensure that all people are able to enjoy peace and prosperity. Each of the SDGs includes specific targets, some of which are meant to be reached by 2030, along with indicators intended to help focus efforts, monitor progress and promote accountability. The SDGs represent challenges that, while global in nature, are sufficiently common that nations worldwide can apply them. Certain ESG-focused mutual funds are identifying the SDGs that their portfolio companies address. In this way, investors are able to direct capital toward those goals. |
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Global Impact Investing Network (GIIN) — Fostering worldwide thought leadership The GIIN is a global nonprofit organization established to drive thought leadership in impact investing. It has been instrumental in accelerating the development of the industry by building a critical infrastructure and developing education and research methods. Through networks, events, investor training programs and industry research, the GIIN provides a platform for investors to exchange knowledge, highlight innovative investment approaches and build an evidence base for the industry. |
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United Nations Principles for Responsible Investing (U.N. PRI) — Guidelines for institutional investors The PRI is an independent institution supported by the United Nations and is considered to be the world’s leading proponent of responsible investment. Working together with investors and global policy makers, the PRI has developed the following six principles as a voluntary and aspirational set of guidelines for developing a more sustainable global financial system.
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Sustainability Accounting Standards Board (SASB) — Defining metrics for ESG outcomes The SASB, established in 2011, is an independent board that sets standards for the disclosure of material ESG information by public companies in their mandatory filings. Access to accurate and relevant information has been a key challenge for investors seeking to analyze the ESG outcomes of their investments. The SASB is meant to address that deficiency. |
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.
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