Hello wonderful people, Cyril White, Certified Financial Planner with Four Financial Management. It is my mission to help as many of you become as wealthy and as healthy as possible!
My clients are driven by their very strong personal values and goals. They aim for strong financial performance, but also believe that their investments should be used to help contribute to advancements in social, environmental, and governance practices. They may actively seek investments that are likely to provide important societal or environmental benefits.
Just as there is no single motivation for Sustainable, Responsible and Impact (SRI) investing, there is no single term to describe it. Depending on their emphasis and/or perspective, investors use such labels as “ESG investing,” “ethical investing,” “green investing,” “impact investing,” “mission-related investing,” “responsible investing,” “socially responsible investing,” “sustainable investing” and “values-based investing,” among others. Preferred terminology continues to evolve, and is often different by geography. For example, you will find “responsible investing” is the most popular term in the United Kingdom. In the United States, “sustainable investing” is becoming the most popular term to cover the entire field, and you will see “sustainable investing” or “sustainable investment” used interchangeably with “SRI investing” and “SRI investment” throughout this course and its corresponding materials.
Few definitions in the world of finance are considered as ambiguous as the term “ESG.” Across the globe, ESG is recognized as one of the biggest buzzwords in financial services, despite being a relatively unknown acronym as recently as just 10 years ago. Financial professionals cannot help but notice that “ESG” is often conflated with “SRI” and is often used in U.S. financial media more often that “sustainable investing.” One would be hard pressed to find another concept as old as SRI that has managed to evolve so much in such a short time, and the conflation of terminology is indicative of how fast things can change. In order to understand the definition of SRI today, one first must examine the widespread shift in attitudes toward SRI that occurred in only the past few decades.
Until just recently, and still by some, SRI has been most commonly expressed as an acronym for socially responsible investing, which began as an investment strategy based solely on social criteria, namely avoiding or screening out investments in certain industries that have a controversial (or in the case of religious investors, a “sinful”) quality to their line of business. Examples of such industries would be tobacco, alcohol, pornography, firearms, military/war, and gambling. These financial strategies were aimed at maximizing financial gains while at the same time optimizing “social good.” But who gets to decide what is “good” for society? Since the origins of socially responsible investing were primarily motivated by religious teachings, in order to be more inclusive to a world of sustainable business practices, a shift in terminology was necessary.
Therefore, in recent years, SRI has come to be defined as any investment strategy that seeks to maximize financial return while simultaneously advancing an idea, belief, or philanthropic cause that is important to the individual investor, with the hope of changing the world for the better. SRI alone is extremely broad and can use multiple channels or strategies to achieve important qualitative investing goals (as noted in Figure 1). However, the global financial industry at large has embraced sustainable investing as the all-encompassing term for any form of SRI discussed below, because not only is its scope more inclusive, but it also places greater emphasis on financially important issues to investors.
My definition of SRI will always depend upon the particular investor, and can encompass any one, or combination of, the terms outlined in Figure 1. I will discuss each of these terms in tern in separate videos to come!
Figure 1: The Definition of SRI
Source: US SIF, www.ussif.org, 2019.
It is possible that investors and investors will come across some or none of the terms discussed, but is nevertheless important to understand their definitions.
ESG investing. This strategy incorporates measurable criteria in order to compare investments across three main categories: environment, social, and governance. Depending on the preference of the individual, greater emphasis can be placed on one category or subcategory of ESG more than others. The concept of ESG and how it relates to SRI is discussed in greater detail in another video. In some instances, ESG investing, and Triple Bottom Line investing are used interchangeably.
Green investing. As a general rule, green investing focuses on investment activities in companies or projects that are committed to conserving natural resources, advancing the production and discovery of alternative energy sources, encouraging the implementation of clean air and water policies, and supporting other business practices that positively impact the environment.
Impact investing. This term is generally understood to mean investment in companies, organizations and funds with the explicit intention to generate positive social and environmental impact alongside a financial return, which can range from below market to market rate.
Program-related investing. Philanthropic foundations in the United States are required by US Internal Revenue Service rules to disburse 5% of their endowments each year in charitable grants. The IRS stipulates that foundations may meet part of the 5% requirement through program-related investments, which must meet the following requirements: Their primary purpose is to accomplish one or more of the foundation’s exempt purposes, production of income or appreciation of property is not a significant purpose, and influencing legislation or taking part in political campaigns on behalf of candidates is not a purpose.
Sustainable investing. Sustainable investing uses ESG criteria to understand what risks could derail the company from staying this course and allows for investors to help ensure that the company stays the course to sustainable growth. For example, if a company has a demonstrably poor environmental or governance record, it can have a higher risk of negative consequences, like legal actions and regulatory penalties. Sustainable investing is actually twofold: maintaining the sustainability of the investment (the company and the portfolio) and maintaining the sustainability of the world.
Some additional terms that fall under the SRI umbrella are:
Ethical investing. Similar to socially responsible investing, in that it ensures that specific ethical practices or religious beliefs are used as a screen for investments. It can also refer to avoiding investments in countries run by authoritarian regimes and avoiding investing in companies that fund politicians openly opposed to the democratic system. Examples of this include corporations donating to members of Congress who voted against certifying the 2020 election in the U.S. and companies doing business in Russia (and other authoritarian countries).
Mission-based investing. Similar to impact investing, mission-based investing refers to foundations using investments as tools to achieve specific philanthropic goals while at the same time generating competitive rates of financial return.
Responsible investing. Responsible investing (RI) determines a benefit to society using ESG factors. In other words, this strategy is geared toward how a company manages risk and generates returns in a way that is most beneficial to society. RI is the most common terminology for SRI in the UK and other Commonwealth countries like Australia and Canada.
Triple-bottom-line investing. Using an accounting framework, triple-bottom-line investing (TBL or 3BL) measures the degree by which a company’s social responsibility, its economic (or financial) value, and its impact on the environment (or ecological impact) work together to add greater business value. The main difficulty with TBL is being able to find appropriate metrics or being able to properly quantify a company’s environmental and social impact. However, many community development and microfinance projects use the TBL methodology to attract potential investors. As mentioned earlier, it can be used interchangeably with ESG investing in some markets.
I would love to know if you feel that your values are adequately represented in your investment portfolio and what values are important to you.
For 25 years I have helped families work towards their financial goals!
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This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy. The opinions voiced in this material are for general information only are not intended to provide specific advice or recommendations for any individual.
Socially Responsible Investing (SRI) / Environmental Social Governance (ESG) investing has certain risks based on the fact that the criteria excludes securities of certain issuers for non-financial reasons and, therefore, investors may forgo some market opportunities and the universe of investments available will be smaller.
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