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Portfolio > Portfolio Construction > ESG

SRI, ESG or Sustainable Investing? Confusion Over Names Limits Growth, Report Says

By Bernice Napach

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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.

The institute surveyed its own member firms about sustainable investment terminology and found that almost all respondents thought there were too many overlapping terms for sustainable investing and product names.

The survey asked respondents to place different sustainable investing terms under four labels: exclusion investment (screening out investments in companies and countries); inclusion investment (investing in companies and countries based on certain data about issues or outcomes); impactful investments (choosing investments for their potential positive, measurable impact on society): and philanthropic investments, a category suggested by some member firms.

The survey found numerous instances where a single sustainable investing term was grouped under multiple categories. Impact investing, for example, appeared in all four columns, values-based investing in two (exclusion and inclusion categories) and triple bottom line, a term that Investopedia defines as investments focused on people, planet and profits but others define as a focus on environmental, social and governance (ESG).

“The time is ripe for the industry to begin a process to coalesce around standards that will help grow the sustainable finance market,” the report notes, citing Green Bond Principles, which provide guidance on the key components for launching a credible green bond and for allowing investors to evaluate the bonds’ environmental impact. “Alignment around fewer, simpler sustainable investment terms will enhance transparency and bolster confidence in the integrity of the market.”

The report concludes: “Simplifying investment terminology may not be the silver bullet to achieve the goals of the Paris Agreement or the SDGs [sustainable development goals adopted by UN member states]; however, it is an essential and necessary part of the solution.”

The IIF is working with Global Sustainable Investment Alliance (GSIA) and PRI (Principles for Responsible Investment), which track sustainable investing volume, to work toward a more common language on sustainable investing.

— Related on ThinkAdvisor:

Bernice Napach

@Think_Napach

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