Introduction to sustainable, responsible, ESG and ethical investment

About sustainable, responsible, ESG and ethical investments

Historically, most investors paid little or no attention to sustainability, environmental, social and governance issues – or the wider responsibilities associated with asset ownership.

This has changed very rapidly over recent years.  There is now a wide range of fund options that are popular –  if not always sufficiently well understood.

Funds that do so are known as sustainable, ESG (environmental, social and governance), ethical, impact or SRI (sustainable/socially responsible investments) funds.

As the names imply, their strategies are different – although there is much crossover between them which means they are still sometimes used interchangeably.

Funds vary both in terms of the issues they consider and how they deal with the risks and opportunities they face – which is why there are around 300 filter options on our Fund EcoMarket database.

The main ways in which these funds vary relate to the issues they consider, or focus on, and the way in which they deal with the risks and opportunities those issues present – which may be reflected in the fund’s aims and objectives.


  • Environment e.g. climate change, pollution, biodiversity and nature, environmental management, waste management, the use of natural resources – including water, forestry, mining
  • Social e.g. human rights, labour standards, child labour, equal opportunities, food supply, health and safety, diversity and inclusion
  • Governance e.g. issues relating to company management, such as; board structure, diversity, executive remuneration, bonuses, avoidance of bribery and corruption
  • Ethical e.g. values based and ‘personal’ ethical concerns, such as; tobacco, armaments, guns, pornography, alcohol, irresponsible marketing or advertising, animal welfare, animal testing (for cosmetics, medical or pharmaceutical purposes)


The three main groups of ‘approaches’ fund managers can offer are:

  • Positive stock selection:  This is where fund managers buy shares or other investment instruments offered by organisations (normally listed companies, but also bonds, sovereigns etc) that meet certain criteria or are widely viewed as contributing usefully towards a fund’s objectives – which in this area normally related to helping build a more sustainable future. The proportion of revenue that relates to desirable activities varies.
  • Avoidance or exclusions:  This is where fund managers exclude or do not buy certain investments that fail to meet certain criteria or requirements.  This typically relates to what the company does (or makes) and, or how it operates.  Funds that say they avoid certain areas should be expected to do so – however strategies vary and different funds have different criteria (eg a fund with tobacco exclusion policy may invest in supermarkets if its tobacco related income is below eg 10% of revenue.)
  • Stewardship or engagement:  This is also known as ‘responsible ownership’ which is broadly where a fund managers work with the assets they hold to encourage sustainability related improvements.  This can relate to a relatively minor aspect of their business or it may be more significant.  In equity markets voting activity typically follows engagement (dialogue). This will typically involve shareholders supporting, opposing or abstaining from proposals put forward at annual general meetings (AGMs) by company directors and others. In bond markets the litmus test typically relates to whether or not an investor is prepared to support future bond issuances – which is often influenced by companies’ response to engagement from responsible owners.

What do the various commonly used fund labels mean?

The following are some common fund descriptions. Be aware – funds that use these labels vary. They may focus on different issues or apply different approaches – as described above.

Sustainable investment – indicates a focus on sustainability issues, or more precisely, investing in ways that safeguard our collective longer-term future, which means focusing on both environmental and social issues.  Funds that have a ‘sustainability tilt’ apply a lighter version of this strategy and may invest in controversial assets.

ESG – funds that describe themselves as ‘ESG’ – environmental, social and governance – can typically be expected to focus on the investment risks associated with poor management of ESG issues. Such funds typically focus on ‘how’ companies operate, rather than ‘what’ they make or do.  The extent to which ESG strategies drive investment decision making varies greatly between funds. ‘ESG integration’ is a common feature of most investment funds today because environmental, social and governance issues can significantly impact investment returns.

Ethical – ethical funds pay more attention to ethical or values-based issues than most other funds and tend to focus on excluding named industries, activities and/or behaviours, such as armaments and tobacco.  Many funds in this group are however similar to sustainable funds, and tend to be active stewards of capital.

SRI – this acronym has two meanings.  We use it to describe ‘sustainable and responsible investment’ – as do many UK investors.  It is used as a generic description of options that focus on sustainability as well as responsible ownership issues (engagement and voting to encourage higher standards).  The term was however first used in the USA to mean ‘socially responsible investment’ where the focus is ‘people issues’ and the approach is normally negatively oriented (exclusions).

Impact investment – this term originates from private markets, where capital is used to finance new activity that might not otherwise have been possible (‘additionality’), however in the fund market it is used to describe investment in assets that deliver positive real world benefits, which includes listed equities and bonds.   The key differentiator of these funds is the express intention to  focus on the delivering of specific, ‘measurable’ real world benefits and outcomes.

Stewardship and Responsible ownership – are terms used to describe investor activity that aims to encourage higher ESG and / or sustainability standards in the investments held by the manager (although activity may extend beyond this scope).  The key elements of these strategies are dialogue with company management (‘engagement’) and shareholder voting (at AGMs or EGMs).  The aim of such activity is normally to help make a company more resilient and successful longer term by encouraging management to focus on sustainability risks and opportunities.

SRI Styles

We describe the most common combinations of ‘issues and approaches’ via our ‘SRI Styles’ labels.  See our ‘SRI Styles directory‘.  Please note these are different from the FCA’s fund labels.

Fund specifics

Our Fund EcoMarket database lists – and allows you to filter funds by over 250 different sustainability and ESG related characteristics in any combination, allowing you to create a bespoke list of potentially relevant fund options.