as seen on: investopedia.com and nasdaq.com
Responsible Investing has come a long way over the last few years. With the help of clearly focused investors, investment companies, non-profit steering groups and recently buoyed up by measurable ESG ratings published by Morningstar, many investors are finding better and more reliable ways to invest at the intersection of head and heart.
Current Wealth of Terminology Used to Describe Responsible Investing
With so many ways used to describe the aspects of responsible investing, the terms used and understanding their definitions can be overwhelming.
Just a few of the terms that I’ve seen to describe investing ‘to support a specific purpose’ are:
· values based investing | · sustainable investing |
· responsible investing | · green investing |
· purpose driven investing | · community investing |
· socially responsible investing · mission focused investing | · impact investing · responsible Investing |
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The Responsible Investing Lexicon - A Work in Progress
As the focus on Responsible Investing continues to grow, investment leaders and SRI non-profit leadership groups are defining and refining the many common buzzwords investors use to describe their brand of Responsible Investing.
It makes a lot of sense that definitions of investment terms surrounding responsible investing will differ. When it comes to religious points of view, moral principles, environmental impact, business’ governance practices, doing social good in the world or a combination of some or all of these things, responsible investing is a way to grow investments that mirrors each investor’s own values.
How we agree to describe our responsible investment philosophies in a way that everyone understands is continuing to evolve. But, one thing is certain, no matter how we ultimately agree to describe responsible investing, more and more investors in the United States want their dollars ‘to grow the good’ in their world communities while growing their portfolios.
The ‘Big 3’ – Three Key Terms for Understanding Responsible Investing
Over the last several years, three key definitions have emerged to describe the current most common ways of investing responsibly.
- Values Based Investing/ Socially Responsible Investing-SRI (Exclusionary)
A way to invest that typically supports a set of religious or moral convictions. Investments for values based investors are found by using ‘negative screens’ that are used to exclude investment in specific companies and industries from consideration.
The most commonly used negative screens eliminate the stocks and bonds of companies associated with the sales or promotion of alcohol, gambling, tobacco, fire arms, weaponry, nuclear power, abortion and adult entertainment.
Investments are ultimately chosen from the non-excluded universe of companies based upon a set of financial criteria.
- Environmental, Social and Governance (ESG) Investing (Inclusionary)
ESG is investing by evaluating qualitative -Environmental, Social and Governance (ESG) measurements and typical quantitative financial measures. In order to gauge the suitability of an investment for inclusion in a portfolio, both the quantitative and qualitative data are considered.
This responsible investment style allows investors to include best-in-class companies from an investment sector (such as the energy sector) which might otherwise have been excluded from investment consideration. Too, companies that only manufacture with recycled materials or those that produce a low carbon foot print may be featured as an ESG investment theme.
Companies ultimately chosen for investment reflect those businesses whose financial and social impacts can be measured and often include best-in-class companies across many economic sectors.
- Impact Investing - Focused Social Investing
Often focused in their own communities or even at the annual stock holder meetings of publicly held companies, impact investors are looking to make measurable social impacts with their investment dollars.
Investing in green bonds, changing corporate environmental, social and governance policies and providing affordable housing at a community level are each good examples of impact investing.
The Importance of Responsible Investing to Today’s Investors
Per The Forum for Sustainable and Responsible Investment (US SIF), sustainable investment in the US has grown 33% from 2014 to 2016[1] . And in data from 2016, SRI type investing represented more than 20% of total assets under professional management in the United States[2].
Clearly, no matter what it’s called, investing in a way that features social, environmental, governance and/or moral purpose continues to take the United States by storm. Responsible Investing has truly risen to top of mind when individual investors choose their investment portfolios.
[1]http://www.ussif.org/content.asp?contentid=40 and http://www.ussif.org/files/Infographics/Overview%20Infographic.pdf US SIF Foundation's 2016 Report on US Sustainable, Responsible and Impact Investing Trends. Infographics
[2] Ibid