ESG and me – the terminology of ethical investing
In recent years, interest in ethical and sustainable investing has soared among the UK’s rising population of socially and environmentally conscious consumers.
However, the growing list of terms used to define different types of ethical investments has the potential to confuse prospective new investors. The widespread use of acronyms, combined with a lack of industry-wide standard definitions for sustainable and ethical investing, only adds to the confusion.
The moral maze
There are, however, a number of common terms used within the sector; understanding the key differences between them can help investors navigate their way through the terminology maze:
Ethical investing is the practice of selecting investments based on ethical or moral principles. This is typically done by filtering out harmful activities (negative screening) and proactively seeking to invest in companies that are committed to making a positive impact through their environmental, social and governance (ESG) practices (positive screening)
This three-letter acronym stands for Environmental, Social and Governance, and refers to three key factors used by investment companies to evaluate corporate behaviour:
Environmental factors – such as carbon emissions, waste management and air or water pollution
Social factors – such as human rights, labour standards and data security
Governance – such as board diversity, business ethics and executive remuneration
In essence, sustainable investing uses the ESG principles to actively select companies that are having a positive impact on the world. It’s therefore a less restrictive approach than ethical investing, as it allows for the fact that organisations are typically neither all good nor all bad. So, under a sustainable investment strategy, a fund manager would be allowed to invest in an oil company that was developing clean, renewable energy sources.
If you want to find out more about ethical and sustainable investing, get in touch.
The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated.