The vocabulary to know to navigate the ESG environment with clients.
Many terms are used in the field of responsible investment. In addition, some concepts are used interchangeably.
“As planners, we need to understand the vocabulary commonly used in order to put each strategy in context and help the client understand its implications,” said trainer Guy Sauvé during a workshop on responsible investment, presented at the 2022 conference of the Institut québécois de planification financière (IQPF).
Responsible investing is a “changing topic,” the specialist added, “because it is not regulated and it means different things depending on the people who use it.”
Here are some definitions provided by the expert in order to keep the conversation with customers alive and translate it into action.
Responsible Investment (RI) or ESG
Responsible investing refers to the ways in which investors can address environmental, social and governance issues in stock selection and portfolio construction. Also known as ESG investing, RI focuses on the strategy and practice of integrating ESG factors into investment decisions.
Socially Responsible Investment (SRI)
Socially responsible investing (SRI) is about investing by investing money in companies that can shape the world in a positive way. “It is considered more ambitious than ESG investing because it has higher expectations for the positive social impact of the company,” says Guy Sauve.
Investment in the best in the category (“Best-In-Class” or BIC)
This approach consists of selecting only those companies that exceed a defined ranking in a sector or industry. Not all BIC funds are considered responsible investments, as they use a multi-sectoral approach and try to retain certain characteristics of an index in order to reduce the tracking gap, says the trainer.
Sustainable investing
Sustainable investing applies to companies that have a positive impact and benefit from major sustainable trends. It also refers to strategies that seek to exclude from clients’ investment portfolios activities considered contrary to environmental sustainability, such as coal extraction or oil exploration.
Negative screening or exclusion
Negative or exclusion screening (or screening) is about avoiding problematic investments such as tobacco or gun companies. One of its limitations is that it excludes large companies for non-financial reasons, which puts it at risk of underperforming the index, says Guy Sauvé.
Positive screening
This approach seeks to maximize financial return as part of a socially responsible investment strategy. It encompasses SRI and ESG factors to integrate them into a traditional strategy primarily focused on profit and return.
Thematic investment
Thematic funds concentrate their investments in certain areas. Some select companies that follow themes related to sustainability, such as sustainable agriculture and climate change. They can also more specifically target certain types of activities, such as electric cars, public transport, smart grids or green buildings.
Green Investment
Similar to thematic investing, it invests in securities related to energy efficiency, pollution control, recycling and efficient waste management.
Impact Investing
Its goal is to have a social or environmental impact by focusing on specific themes. More activist than RI and ESG, he often dismisses companies with questionable business practices and looks for companies that want to generate a positive and measurable social and environmental impact.
Ethical Investing
Often considered a values-based or faith-based investment, it consists of investing in accordance with certain principles by excluding certain companies whose products or services are considered morally reprehensible by investors of certain religious denominations, such as tobacco, alcohol, weapons and nuclear energy.
Social or community investment
It aims to reduce poverty while ensuring the growth of businesses that serve less fortunate communities. These funds enable organizations to provide services such as affordable housing and loans, with the goal of improving the quality of life of communities and reducing their dependence on government assistance.
