SRI, ESG and Me: The alphabet soup of sustainable investing
At first glance, the terminology around the concept of sustainable investing may seem a little murky…so many acronyms!
The ABCs of sustainable investing
But, no matter what it’s called, the objective behind it is to do well (in your portfolio) while doing good (for the world).
In the ever-changing world of investing, it should come as no surprise that negative screening (avoiding alcohol, tobacco, firearms and other so-called “sin” stocks) evolved to include intentionally investing in the good stuff—and then using your money to encourage firms to alter their behavior.
A brief history of socially responsible investing (SRI)
While many investors think that SRI (at least in the U.S.) has been en vogue for just the past few decades, it actually began in the 1700s, when various religious sects forbid their followers to transact with people or businesses that were involved in ethically-suspect activities, such as slavery, gambling, or liquor or tobacco manufacturing.
Fast-forward to the 1960s and 1970s: anti-war investors began avoiding companies that produced biochemical warfare agents, such as napalm. The first sustainable mutual fund—the Pax World Fund—was launched by two United Methodist ministers who didn’t want their church’s investment portfolio to include any companies that contributed to the Vietnam War.
Over the next decade, fossil fuels and apartheid came to the forefront as SRI issues. In 1986, the U.S. government passed a law that prohibited new investment in South Africa. Following the Exxon Valdez oil spill disaster in 1989, environmental activists, investors and businesspeople came together to promote sustainable business methods as Ceres (the Coalition of Environmentally Responsible Economies). By 1994, investors who were interested in sustainability had more than two dozen SRI-focused mutual funds to choose from.
The new millennium
In 2006, the United Nations’ Principles for Responsible Investing (UN-PRI) was formed. Today, this initiative of more than 300 international investors to work together on sustainability (SI) issues, such as human-rights campaigns, environmental concerns, employee diversity and anti-corruption efforts.
Firms that become signatories to the UN-PRI publicly commit to following six voluntary guiding principles designed to help incorporate SI factors into portfolio management and corporate practices. These include:
- Incorporating SI issues into investment analysis and decision-making processes
- Integrating issues into ownership policies and practices
- Seeking appropriate disclosures on SI issues from the entities in which the organization invests
- Promoting acceptance and implementation of the PRI across the investment industry
- Working with other UN-PRI signatories to enhance effectiveness in applying the Principles
- Reporting on activities and progress towards implementing the Principles.
What does SRI look like now?
According to The Forum for Sustainable and Responsible Investment (USSIF), there are several different approaches to incorporating SI in your portfolio.
Exclusionary investing is all about avoiding investments in certain sectors of the economy (such as tobacco, weapons and fossil fuels). At the individual level, it involves selecting a range of investing criteria aligned with your personal beliefs.
May be known as: negative screening, exclusionary screening, divestment, SRI
This approach doesn’t mean simply avoiding investments based on unwanted ESG factors. Instead, ESG integration involves including financially relevant sustainability insights when investigating and choosing investments.
May be known as: positive/best-in-class screening, norms-based screening, ESG investing
This approach involves making investment choices with the goals of creating positive and measurable social or environmental impact (along with strong portfolio returns).
According to the Global Impact Investing Network (GIIN), impact investing combines investor intentionality, setting return expectations that fall within a particular range and that apply to various asset classes, and committing to measuring the social and environmental performance of the investment.
May be known as: impact investing, thematic investing, community investing
What about you?
Which approach best aligns with your investment goals? Learn more about our sustainable investing capabilities and insights.