If you’re reading this, then chances are you are interested in sustainability, and perhaps specifically, how it relates to the economy and your own personal finances. One quick Google, and before you know it, you’re faced with a variety of acronyms and terminology and probably wondering what it all means. It is common for these acronyms and new terms to be thrown around, but behind them, there is real meaning beyond simply being used for marketing purposes.
In this article, we will demystify three of the most common pieces of jargon you will likely have come across; ESG, SRI and Impact Investing. In the modern world of finance, what counts as “value” is changing, and with that new measures are required…
ESG: A measure of non-financial risk
ESG stands for Environmental, Social and Governance. Beyond the profits of a company detailed in their balance sheet, there are a host of other factors that could potentially impact a firm’s overall health and growth. Environmental disasters, bad reputation, high carbon-footprint, poor management, these are all examples of risks that could have an adverse impact on a company. A fund manager, for example, must look at a company from a holistic angle, taking into account anything that falls within one of these three categories before deciding whether to invest. An ESG score therefore, is an essential metric that allows an investor to gauge the risk of investing into a company.
Critics who call ESG “woke” are missing the point. An ESG is an essential risk score that must be taken into account when deciding what to invest in.
Bottom line, if you’re looking to invest in a company, you need to look a the big picture. ESG is a measure that forms part of that picture.
SRI: The ethical measure
SRI, or Socially Responsible Investing is a mechanism that predates ESG. It is effectively a filtering mechanism that allows a would-be investor to screen out companies that do not align with their own personal values.
For example, some investors may want to screen out fossil fuels, gambling, arms companies etc, and focus instead on companies with strong sustainability credentials, such as those with a focus on renewable energy.
SRI is less about risk, but rather identifying investment opportunities that align with your own personal values.
Impact Investing: What impact is your money making?
So far we’ve looked at ESG: what are the risks associated with a company and what could go wrong? We now know that SRI is a mechanism to decide what we shouldn’t invest in. Impact investing asks a bigger, more open question: What impact am I making with my money?
The focus of impact investing is investing in companies that proactively, and importantly, measurably, deliver environmental and social change. Outwardly and obvious green investments such as renewable energy stocks, climate change tech, green bonds, all by design, make a positive impact on the world in which we live.
The key is, how do we measure the impact? Common measurements to assess the impact include:
- Tonnes of carbon avoided
- Jobs created
- Households electrified/moved away from fossil fuels
Importantly, impact investing expects to make a return. It aims to solve the world’s environmental problems, whilst making a return for share holders. In other words, it aims for a win/win result.
Conclusion
As an investor, your approach to investing is completely your decision. However, by now I hope that you are more familiar with some of the key terminology that is thrown around. Perhaps one final point on sustainable investing, is to be aware of companies who really are delivering on sustainability. It is important to look beyond the glossy brochure, or the green coloured website. A company that has sustainability in its DNA will be fully transparent, clearly showing their methodology for how “sustainable” they really are. Look for the detail, the numbers, not just the flashy labels.
As the planet changes, how we invest our money is becoming more important than ever before and we, as individuals, can have a real impact on how firms invest and even operate. By shifting investment to sustainable companies, we shift the dial on which companies have the ability to develop and prosper in a planet that is deteriorating. Sustainable investing is about making a positive change in a changing world, whilst also making profitable returns for our own future.
