The Challenges of Terminology
There are a great many terms referring in some way to practices related to responsible investing: socially responsible investing; mission-related investing; impact investing; integrated reporting; and investing according to environmental, social and governance principles. These terms are often grouped under the same category of responsible investing, but this generalization is misleading because it overlooks the fact that what these terms mean in practice is very different. This proliferation of terms is a complicating factor for many who are new to the field. Perhaps the two most common terms are socially responsible investing and environmental, social and governance.
Socially responsible investing (SRI) has been around for a long time. Environmental, social and governance (ESG) factors are a relatively newer concept – coming into prominence in 2006 with the launch of the UN PRI (Principles for Responsible Investment). The terminology tends to be used loosely thereby causing confusion for many investors. Of course, the various aspects of SRI and ESG may be interpreted differently by some organizations, but here are a few basic differences.
SRI | Defining Characteristics
Investments driven first by ethical values.
Use Negative Screens
Organizations prohibit investment in certain companies or industries depending on the investor’s criteria. For example, some health-related organizations prohibit investment in tobacco companies.
SRI is typically more narrowly defined by the investor. For example, divest the portfolio of the top 200 fossil fuel companies.
SRI screens are different for different investors. Some organizations impose religious or ethical screens like no alcohol, gaming, or fetal tissue research companies. Tobacco screens are employed by some health-related organizations. Sudan, South Africa and weapons have been the focus of some divestment campaigns. But the key point is that different organizations have different priorities, so SRI criteria are not universal but very organization-specific.
ESG | Defining Characteristics
The inclusion of long-term sustainability factors guides investment research to identify companies with higher investment potential.
No Negative Screens
Specific investments are not prohibited, but rather rankings are assigned to ESG factors for a company in any industry. These ESG rankings are used as part of the overall investment research process. Poor rankings do not necessarily exclude a company from investment but are cause for further evaluation and consideration.
ESG incorporates a broad set of factors to guide security selection. For example, which natural resource companies are less likely to experience catastrophic events because of their environmental and safety practices?
More Universal Approach
ESG is still in development, so the application of these factors will evolve, but the theory is that certain factors have broad applicability to all investment options. For example, good governance, strong shareholder rights, and transparency are positives for investors in any company.
Connecting Investing and Mission
Commonfund has been a long-term advocate of the concept of intergenerational equity—the principle that endowments and foundations balance the needs of the present generation with the needs of future generations. This long-term approach to the sustainability of missions places great importance on the management of investment portfolios—giving your organization the best chance of fulfilling its mission now and in the future. We believe that organizations that do good must also do well in order to perpetuate their influence. By incorporating SRI or ESG factors into the investment process, organizations may provide additional support to their goal of doing well and doing good.