Values-aligned investing is called by many different names, which are commonly misused or misunderstood by investors.
Let me decode the lingo, because a shared understanding of the terminology makes this type of investing more accessible to advisors and investors alike. Please note that there are no universally agreed upon definitions among professionals, and everyone uses the words a bit differently. After 15 years of working in this space, this is how I define the most commonly used terms.
ESG: ESG is shorthand for "environmental, social and governance data." Business data in each of these three categories are used in tandem with traditional financial metrics to more deeply understand the risks and opportunities an investable company faces.
Often, ESG data are referred to as "non-balance sheet risk" — but an unexpected incident can quickly move that risk onto the balance sheet. The key takeaway is that ESG is data. How each fund manager or investment professional uses that data varies widely. For more on the different ways ESG data are used, see the ESG section of this article.
SRI: SRI stands for "socially responsible investing." However, some professionals have kept the initials and substituted new words: "sustainable, responsible and impact investing." Here, I am defining the traditional and more commonly used term, socially responsible investing.
SRI has historical roots in investing and divesting according to religious values. It grew to include expressing secular values, as well, historically through divesting (choosing not to own and/or selling existing ownership) paired with shareholder engagement (groups of shareholders in conversation with company management about advancing social or environmental good within the company or the communities affected by the company's business) and proxy voting (how shareholders elect boards and vote on other corporate matters).
The term SRI now also encompasses thoughtful investing in companies that do well by people and planet, as well as lending to underserved communities. The key takeaway is that SRI tends to express values. The values may be those of the client, general values for a fund or thematic values (investing in renewable energy, for example).
Impact investing: The term impact investing has historically been used to refer to private investments in companies with environmental or social good embedded in the mission of the company, and lending to underserved communities. In this historical context, returns ranged from concessionary to market rate. In the last few years, along with rising demand for all types of values aligned investments, the term impact investing has been used more broadly, often referring to public equities, muni bonds, corporate debt and lending notes, as well as private investments. The key takeaway is that impact investing is investing in companies with intention to do good.
Sustainable investing: This is a broad term that might be used in place of one or any combination of the terms defined above. Sustainable is the word that research firm Morningstar uses in its rating systems so it is common in the mutual fund and exchange traded fund lexicon.
Green investing: Green investing is another broad term that tends to be used to refer to investments with an environmental focus.
Mission-driven or mission-related investing: MRI, referring to both mission-driven and mission-related investing, is often used when foundations invest their endowments in keeping with the values of the organization. These terms are often used by religious organizations, as well, when they select investments that reflect their religious values.
Ethical investing and values-based investing: These are both broad terms for investments that reflect the ethics or values of the investor. The investment philosophy is likely similar to SRI, impact investing or a combination of the two.
It's obvious there is so much terminology and no unifying agreement of definitions. That's why when you talk about ESG or values-aligned investing, it's important to make sure you are on the same page as the person you are speaking with.
When choosing investments that are listed as ESG, SRI, impact, sustainable or any other term, it is imperative that you look past the name of the investments to the underlying holdings of the portfolio. You, as an investor, should understand both the intention and investment philosophy of the financial professional or investment manager you have entrusted your hard-earned money with to invest.
— By Sonya Dreizler, founder of Solutions With Sonya