The multitude of terms used to describe sustainable investing is keeping a lid on money flows into those investments.
According to a report from the Sustainable Finance Working Group of the Institute for International Finance, “The financial services industry has inadvertently created a proliferation of terms that may confuse rather than clarify investment objectives and outcomes.”
Firms are currently using 80 different terms to describe various forms of sustainable investments, according to the report. At best this proliferation of terms makes it difficult to compare investment products; at worst it intentionally misleads investors into believing that certain investments are aligned with sustainability goals when they aren’t, an approach known as ”greenwashing,” the report notes.
Even two of the leading advocacy organizations for sustainable investing define the approach differently. The Global Sustainable Investment Alliance, comprising the world’s largest sustainable investment membership organizations, including the US Forum for Sustainable and Responsible Investment (US SIF), does not distinguish sustainable investing from terms such as responsible investing and socially responsible investing.
The Principles for Responsible Investment (PRI), a network of global investors committed to ESG issues, prefers the term responsible investment, which it defines as incorporating ESG factors into investment decisions to better manage risk and generate long-term returns. PRI believes responsible investing is broader than socially responsible investing (SRI) or impact investing.
The confusion and expansive terminology used in the world of sustainable investing affects both individual and institutional investors.
A Schroders survey of 22,000 individual investors globally found that more than 50% of them refrained from investing more in sustainable products due to a lack of information and/or understanding of what is sustainable investing, according to the report. A survey of 233 institutional investors globally found more than 25% citing the same reasons for the dearth of responsible investing. Almost half of those respondents believed an agreement on terms and definitions would make sustainable investing more accessible.