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Responsible Investing: Terminology and Background

December 16, 2024 |
2 minute read
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Responsible Investing: Terminology and Background
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In recent years there has been a rise in available investment strategies and governance considerations to help investors adapt to evolving challenges in the responsible investing space. Norms and culture surrounding the idea of what it means to be a prudent person, and the legal responsibility of fiduciaries, is being debated in a time of heightened politicization of many topics. It also continues to shift as more data brings to bare evidence of materiality and opportunity for both societal and financial benefit.

THERE ARE THREE MAIN CATEGORIES OF RESPONSIBLE INVESTING IN INVESTMENT MANAGEMENT TODAY:

  • Environmental, social and governance (ESG) investing is an investment practice that involves systematically integrating the three ESG factors into fundamental investment analysis to the extent that they are material to investment performance. This is often deemed a risk management framework.
  • Negative screening (synonymous with “socially responsible investing” or SRI) is a portfolio construction process that attempts to avoid investment in certain securities or industries through negative screening according to defined ethical guidelines.
  • Impact investing is investing in projects, companies, funds or organizations with the express goal of generating and measuring mission-related economic, social or environmental change alongside financial return.

These strategies can serve different but overlapping purposes in a portfolio. For example, integrating ESG factors into investment decisions as a risk framework aims to improve long-term investment performance. Yet divesting from fossil fuels to mitigate transitional, physical, or reputational risk, could also be viewed as an ESG strategy—when considering the risks potentially associated with those investments—or a mission-related negative screen.

As such, some frameworks, including the United Nations Principles for Responsible Investing (PRI), include both negative screening and thematic investing as an ESG tool. Impact investing, on the other hand, explicitly focuses both on financial and non-financial outcomes and allows investors and committees to move resources directly toward mission-specific goals. Further, there are passive and active strategies for investors to consider, and they can be integrated across all asset classes. These strategies can also be thought of as being on a continuum, from mission alignment, in which negative screens are used to ensure investments do not run counter to the mission of the institution, to portfolio integration of ESG factors, and finally to mission impact, in which investors seek returns while having a direct impact on mission. Data reported in the Commonfund Benchmarks Studies show that over the past 10 years more and more institutions are taking steps to either be on this continuum or to progress within it.

To learn more about responsible investing, download our whitepaper, "Navigating the ESG Landscape."

The goal of this work is to provide a road map to responsible investing for governing boards and committees who are considering whether and how to integrate environmental, social and governance factors into their investment process.

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Certain information contained herein has been obtained from or is based on third-party sources and, although believed to be reliable, has not been independently verified. Such information is as of the date indicated, if indicated, may not be complete, is subject to change and has not necessarily been updated. No representation or warranty, express or implied, is or will be given by The Common Fund for Nonprofit Organizations, any of its affiliates or any of its or their affiliates, trustees, directors, officers, employees or advisers (collectively referred to herein as “Commonfund”) or any other person as to the accuracy or completeness of the information in any third-party materials. Accordingly, Commonfund shall not be liable for any direct, indirect or consequential loss or damage suffered by any person as a result of relying on any statement in, or omission from, such third-party materials, and any such liability is expressly disclaimed.

All rights to the trademarks, copyrights, logos and other intellectual property listed herein belong to their respective owners and the use of such logos hereof does not imply an affiliation with, or endorsement by, the owners of such trademarks, copyrights, logos and other intellectual property.

To the extent views presented forecast market activity, they may be based on many factors in addition to those explicitly stated herein. Forecasts of experts inevitably differ. Views attributed to third-parties are presented to demonstrate the existence of points of view, not as a basis for recommendations or as investment advice. Market and investment views of third-parties presented herein do not necessarily reflect the views of Commonfund, any manager retained by Commonfund to manage any investments for Commonfund (each, a “Manager”) or any fund managed by any Commonfund entity (each, a “Fund”). Accordingly, the views presented herein may not be relied upon as an indication of trading intent on behalf of Commonfund, any Manager or any Fund.

Statements concerning Commonfund’s views of possible future outcomes in any investment asset class or market, or of possible future economic developments, are not intended, and should not be construed, as forecasts or predictions of the future investment performance of any Fund. Such statements are also not intended as recommendations by any Commonfund entity or any Commonfund employee to the recipient of the presentation. It is Commonfund’s policy that investment recommendations to its clients must be based on the investment objectives and risk tolerances of each individual client. All market outlook and similar statements are based upon information reasonably available as of the date of this presentation (unless an earlier date is stated with regard to particular information), and reasonably believed to be accurate by Commonfund. Commonfund disclaims any responsibility to provide the recipient of this presentation with updated or corrected information or statements. Past performance is not indicative of future results. For more information please refer to Important Disclosures.

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Disclaimer

Certain information contained herein has been obtained from or is based on third-party sources and, although believed to be reliable, has not been independently verified. Such information is as of the date indicated, if indicated, may not be complete, is subject to change and has not necessarily been updated. No representation or warranty, express or implied, is or will be given by The Common Fund for Nonprofit Organizations, any of its affiliates or any of its or their affiliates, trustees, directors, officers, employees or advisers (collectively referred to herein as “Commonfund”) or any other person as to the accuracy or completeness of the information in any third-party materials. Accordingly, Commonfund shall not be liable for any direct, indirect or consequential loss or damage suffered by any person as a result of relying on any statement in, or omission from, such third-party materials, and any such liability is expressly disclaimed.

All rights to the trademarks, copyrights, logos and other intellectual property listed herein belong to their respective owners and the use of such logos hereof does not imply an affiliation with, or endorsement by, the owners of such trademarks, copyrights, logos and other intellectual property.

To the extent views presented forecast market activity, they may be based on many factors in addition to those explicitly stated herein. Forecasts of experts inevitably differ. Views attributed to third-parties are presented to demonstrate the existence of points of view, not as a basis for recommendations or as investment advice. Market and investment views of third-parties presented herein do not necessarily reflect the views of Commonfund, any manager retained by Commonfund to manage any investments for Commonfund (each, a “Manager”) or any fund managed by any Commonfund entity (each, a “Fund”). Accordingly, the views presented herein may not be relied upon as an indication of trading intent on behalf of Commonfund, any Manager or any Fund.

Statements concerning Commonfund’s views of possible future outcomes in any investment asset class or market, or of possible future economic developments, are not intended, and should not be construed, as forecasts or predictions of the future investment performance of any Fund. Such statements are also not intended as recommendations by any Commonfund entity or any Commonfund employee to the recipient of the presentation. It is Commonfund’s policy that investment recommendations to its clients must be based on the investment objectives and risk tolerances of each individual client. All market outlook and similar statements are based upon information reasonably available as of the date of this presentation (unless an earlier date is stated with regard to particular information), and reasonably believed to be accurate by Commonfund. Commonfund disclaims any responsibility to provide the recipient of this presentation with updated or corrected information or statements. Past performance is not indicative of future results. For more information please refer to Important Disclosures.