As responsible investing becomes more popular, terms like shareholder engagement can still be confusing.
Improved fluency in the language of responsible investing (RI) can help investors have more productive conversations with their advisors, and better explore options, says Tim Nash, a Toronto-based financial planner at Good Investing.
“It’s challenging to keep up with the terminology in this fast-growing space. There is confusion about the different approaches falling under the large RI umbrella.”
A recent report by Franklin Templeton Investments noted that 61 per cent of Canadian respondents deemed environmental, social and governance (ESG) issues to be important considerations for investing. Only four in 10 knew what ESG involves.
Those interested in pursuing this style of investing in 2023 need to know these nine terms in the RI glossary:
- Responsible investing. This broad term covers any investment strategy that incorporates ESG factors, according to the United Nations’ Principles for Responsible Investment. Those factors can be wide-ranging, from climate change, to human rights, to executive pay.
- ESG integration. With publicly traded companies, investors and asset managers can analyze the performance of ESG factors such as greenhouse gas emissions or diversity in the C-suite, along with financial data. The quality of results depends partly on the trustworthiness of the available information, according to the Centre for Sustainable Finance at the University of Cambridge. Beware of “greenwashing,” says Mr. Nash, where companies make claims to reduce emissions, for example, but fail to follow through with reportable, measurable actions.
- Sustainable investing. RI and sustainable investing are often considered interchangeable, Mr. Nash says. Companies with strong ESG metrics are generally considered more sustainable because they’re addressing a range of material risks that could have a negative impact on their profitability. The idea of this investing approach is to find businesses that can sustain growth well into the future.
- Shareholder engagement. As shareholders in publicly traded companies, large RI investors such as pension and endowment funds often seek to engage the organizations to address unmet ESG concerns and manage risks. That can include dialogue with corporate leadership or shareholder action such as putting forward motions at annual meetings. “Through these techniques, shareholders exercise their rights and privileges and have an impact on corporate policy,” notes a white paper by Desjardins Group.
- Divestment. If engagement fails, investors might decide to sell their position in a company. Divestment has also come to mean screening out companies involved in fossil-fuel production, states an RBC Global Asset Management report.
- Negative screening. Divesting of fossil fuels represents a further evolution of negative screening, a strategy made popular in the 1990s when RI was called “ethical investing.” At the time, the approach often involved avoiding investments related to the production and sale of tobacco, pornography, gambling, alcohol and weapons. Beyond divesting from certain sectors, some investment approaches also screen out companies with poor ESG scores overall.
- Positive screening. Similar to ESG integration, this strategy uses the principles of RI to evaluate a stock’s performance. Portfolios are built by selecting only the best-performing companies on ESG metrics for their sector. Positive and negative screening can sometimes go together. “Many investors now incorporate a mix of both approaches, screening out stocks to which they’re morally opposed and proactively choosing the best stocks that are making a difference in areas they care about,” the RI information site Impactivate explains.
- Thematic investing. A spin on positive screening, this involves selecting companies according to a particular RI theme, such as investing in a renewable energy fund.
- Impact investing. This strategy strives to uncover investments that have a beneficial social or environmental impact as well as a financial return, notes the Responsible Investment Association. These investments – which can involve an individual bond, an equity stake in a company or a fund – provide a range of returns while also aiming to support issues such as affordable housing or health equity.