ESG. SRI. Impact investing. Sustainable investing. As a novice investor trying to make good choices for your savings, you may have heard these terms. But what do they mean and why does any of this matter? Today’s post is a primer on sustainable investing. The goal is to help you make sense of the alphabet soup and jargon used by investment managers and financial institutions.  

I’ve worked my entire career in financial services. One of the things that bugs me about the industry, and the corporate world in general, is the number of acronyms and jargon we use. Even after 30 years in the business, I sometimes have to look up acronyms to figure out what people are talking about. It’s why I’m such a fan of plain language—simplifying complex concepts so real people can understand them.

With that in mind, let me attempt to take some of the mystery out of sustainable investing.

Disclaimer: I’m not a financial advisor. Everyone’s situation is different. If you need help with your money, find a qualified financial advisor.

What do all these terms mean?

Let’s start by explaining some of the terms we use when talking about sustainable investing.

ESG investing

ESG is a broad term that refers to evaluating investments based on environmental, social and governance factors. It has been widely adopted as the most common approach to sustainable investing. Let’s have a closer look at each piece:

• Environmental factors are all about a company’s impact on the planet. This area looks at things like greenhouse gas emissions, energy and resource efficiency, water conservation, and pollution.
• Social factors relate to how a company treats its employees, customers and the communities where it operates. This includes a company’s human rights record, along with things like child labour, community involvement, and health and safety practices.
• Governance is about how a company is run. It covers things like executive pay, employee and board diversity, shareholder rights, and board effectiveness.

SRI investing

SRI stands for socially responsible investing. It’s a term that has been around for years. Investopedia defines socially responsible investing as “the practice of investing money in companies and funds that have positive social impacts.”

The idea of what is considered socially responsible evolves with the social and political climate of the times. As climate change has emerged as a critical issue, environmental factors have increased in importance within socially responsible investing.

Impact investing

According to Investopedia, impact investing is “an investment strategy that aims to generate specific beneficial social or environmental effects in addition to financial gains.” The goal is to achieve positive social results with the money that’s invested. Examples of impact investing could include investing in clean energy, education or healthcare.

Exclusionary investing

Also called “negative screening”, exclusionary investing is the practice of not investing in specific industries or companies. Industries usually left out of these types of funds include fossil fuels, tobacco, alcohol, firearms and gambling.

The challenge with this approach is it limits investment opportunities. In a small market like Canada, oil and gas companies make up a significant portion of the large companies available for investing. Instead of excluding oil and gas companies altogether, many fund managers will invest in companies that are taking steps to be more sustainable by investing in renewable energy options. 

Thematic investing

Finally, thematic investing is more of a niche investment strategy. It involves investing in specific long-term trends that are important to you. Thematic investors focus on environmental concerns like renewable energy. They also consider other megatrends they believe will impact the social and economic landscape in the future.

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Why should you care about all this?

If you’re a small investor with modest savings, you may think your investments don’t make a difference—but they do! Individuals around the world make investment choices for trillions of dollars in retirement and other savings. It all adds up to a very big impact.

As a consumer, you make decisions every day about where to spend your hard-earned money. You probably wouldn’t buy products of a company that treats its employees poorly, or gives little thought to how its operations pollute the environment. Your investments are no different.

How do you know if your investments are sustainable?

You may be wondering how you’ll know if your investments are following ESG factors.  

If you’re like most people, you aren’t directly buying and selling stocks. You’re more likely investing indirectly via a mutual fund, or other investment fund. In that case, you’re relying on an investment manager to decide which companies to invest your money in.

The good news is, most fund managers are including ESG evaluations in their investment process. According to a 2020 report from Morgan Stanley, 95% of institutional asset managers—the people who manage your money—are integrating or considering integrating sustainable investing in all or part of their portfolios. And the number one reason they’re doing this is customer demand. So, your voice does matter.

The Morgan Stanley report goes on to say that climate change, water solutions and plastic waste reduction are the top three issues of concern to investors looking for sustainable options.   

To learn more about how the funds you’re investing in apply ESG factors, look at the fund information on the fund manager’s website.

Will it affect my investment returns?

Let’s face it, we all invest in the hope of making a decent return so we can achieve our financial goals.

One of the biggest concerns expressed around sustainable investing in the past is that it would mean lower returns. This has been proven not to be the case. Morgan Stanley looked at performance of close to 11,000 funds over a fifteen-year period from 2004 to 2018. They found returns of sustainable funds to be in line with returns of other funds.

As a consumer, investment decisions are no different than any other purchase decision you make. You might spend a couple of dollars on your morning coffee every day, but you’re likely investing hundreds or even thousands of dollars every year. Understanding sustainable investing principles and applying them to your savings will have a bigger impact over the course of a year than that daily coffee.  

I’d love to hear your thoughts on sustainable investing below.