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Responsible Investing: Terminology and Background

May 9, 2016 |
1 minute read
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The terms socially-responsible investing (SRI), mission-related investing, impact investing and environmental, social and governance (ESG) investing – all frequently grouped under the heading of responsible investing – have become a familiar part of the vocabulary of institutional and retail investors.

Just what these terms mean in practice, however, and how their practitioners’ claims can be impartially assessed, has been less clear.

Responsible investing can be broken into three main categories:

Socially-responsible investing (SRI)

A portfolio construction process that attempts to avoid investments in certain stocks or industries through negative screening according to defined ethical guidelines.

Impact investing

Investing in projects, companies, funds or organizations with the express goal of generating and measuring effecting mission-related social, environmental or economic change alongside financial returns.

Environmental, social and governance (ESG) investing

Integrating the three ESG factors into fundamental investment analysis to the extent that they are material to investment performance.

While these terms may all be gathered under the term responsible investing, these approaches serve very different purposes. SRI and impact investing use funding and investment activities to express institutional values or advance the institution’s mission. In contrast, ESG investing aims to improve investment performance, thereby making additional resources available for mission support.

For a long time, SRI was by far the most widely-used of the three approaches. In recent years, however, it has been argued that, although negative screening can be a useful tool for institutions desiring to express ethical, religious or moral values through their investment portfolio, for many it may prove too restrictive. ESG analysis, on the other hand, takes a broader view, examining whether environmental, social and governance issues may be material to a company’s performance, and therefore to the investment performance of a long-term portfolio.

Thus, while not every institution will choose to engage in SRI or impact investing, fiduciaries of long-term institutional investors should seek to develop a well-reasoned view on their institution’s approach to ESG investing.

Learn more on ESG and SRI factors

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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.