Common Terminology

Some common terms explained:

In brief…

  • Aligned – matching a fund strategy to a stated metric, such as a benchmark eg ‘Paris Aligned’  indicates an intended reduction 7% eCO2 pa
  • ESG / ESG focus  – funds that focus on environmental, social and governance risks (to the value of their holdings).  Many investment managers now consider and ‘integrate’ ESG risks into their investment analysis as tehy have financial implications (known as ‘materiality’).
  • Ethical – personal values related issues eg armaments and tobacco – although be aware that categorisations and opinions shift.
  • Impact – investments, eg funds, that focus on delivering positive real world outcomes.  Approaches vary.
  • Intentionality – indicates an explicit ‘intention’, aim or goal to deliver beneficial (positive) real world outcomes, typically framed as aiding to support the transition to a sustainable future
  • Screen – an investment approach that leads to certain types of assets being either excluded (negative screening) or invested in (positive screening)
  • Stewardship  – responsible ownership activity, typically investors ‘engaging’ with companies to encourage higher standards
  • Sustainability / sustainable  – something that can go on forever – ad-infinitum, meaning that if something is not ‘sustainable’ it can not continue forever and will have a ‘shelf life’
  • Tilt – an approach that leads fund managers to invest slightly more (overweight) or slightly less (underweight) in a named area or type of company, based on their sustainability credentials

Further detail…

Corporate Governance – refers to company management issues such as board structure, remuneration, reporting and bribery/corruption issues.

Corporate Social Responsibility (CSR), also referred to as Corporate Responsibility (CR) –  describes typically ‘non core’ business activity aimed at helping named groups such as local (or other) communities. It typically takes the form of partnerships and donations but does not normally drive where an asset manager’s funds are invested.

Environmental, Social and Governance investment (ESG) – a common acronym which refers to investors strategies that consider (or focus on) the management of environmental, social and governance related risks and opportunities. Such strategies typically focus on risk emanating from how a company operates and manages such risks internally rather than whether or not they focus on sustainability related opportunities or providing solutions to problems.

Ethical Investment (EI) – normally understood to relate to values led funds that apply negative and / or positive ethical screens to determine where they can or can not invest.  These investments often cover a wide range of social, ethical or environmental issues but focus more on ‘personal values’ type issues – such as avoiding companies with involvement in armaments, tobacco, alcohol, pornography, gambling or animal testing – than most other related strategies.

Green Investments – a generic term sometimes used to describe investments which focus on environmental issues.

Net Zero – targeting total carbon (and other greenhouse gasses) emissions being equal to the rate at which they are absorbed (sequestered) so that together their value is nil. Typically applied to a business or country.

Responsible Ownership / Stewardship  / Engagement – dialogue and voting based activity carried out by fund managers with the aim of encouraging investee companies (or other entities) to adopt higher standards.  This typically relates to environmental, social and or governance issues, with some funds being primarily focused on governance.   Approaches differ.  Managers are encouraged to publish ‘escalation strategies’ which may or may indicate that divestment forms a part of their strategy. (See fund manager escalation strategy)

Social, Ethical and Environmental (SEE) – an acronym historically used to describe the entire range of issues covered by SRI, green, sustainable and / or ethical investments. Used in the July 2000 disclosure amendment to the 1995 Pensions Act.

Social issues – a term used to describe the consideration of ‘people issues’ such as human rights and labour standards.

Sustainability – evolved from the term ‘Sustainable Development’ as defined in 1987 Brundtland Report. To paraphrase: ‘…meeting the needs of the present without compromising the ability of future generations to meet their own needs.’  Or in other words perhaps… living, behaving, operating or investing in a way that does not risk damaging our longer-term prospects or quality of life.  In terms of investment this broadly means looking for companies that make decisions about environmental and social issues in a way that safeguard the quality of life of those that are (or may be) – directly or indirectly – affected by their operations (either today or at some time in the future).

Sustainable and Responsible Investment (SRI) – An umbrella term for a wide range of investment strategies that focus on ethical, social and environmental issues.   Includes ethical investments, green investment and engagement. The term ‘Responsible Investment’ is also popular and is broadly similar. This area was previously known as Socially Responsible Investment and has been amended to reflect growing interest in the sustainability agenda and environmental issues rather than focusing on ‘people issues’.