Back in 2019, when we were just starting to explore the field of sustainable investing, our very first blog piece was about how confusing names and unclear definitions were a roadblock for many investors. Back then, we talked about the distinctions between “ESG,” “social responsibility,” and a host of other terms that attempt to define the concept of investing with your values in mind. It wasn’t easy then, and it remains challenging today.
Since that 2019 piece, we’ve seen industry leaders, regulators, commentators, and even politicians weigh in on how values investing approaches should be named and defined. We’ve also seen a lot of backtracking and name changing – such as when Blackrock CEO Larry Fink first embraced the term “ESG investing”, then very aggressively backed away from it.
Changing names midstream is annoying. It’s a problem for companies that try to create and sell sustainable investing products; it’s a problem for advisors and others that try to explain how these products work. It’s especially a problem for investors trying to find the right fit.
For Goodness Sakes, It’s Just a Few Words
Why is it so hard to come to agreement on terms of use? Let’s call it the good, the bad, and the ugly.
The good news is that the interest in combining investing with personal values is substantial. As non-financial ESG data has improved, it has made new types of strategies possible, which has unleashed a backlog of demand. The variability of names and terms reflects the wide range of interests and a host of attempts to match that interest with an innovative strategy.
But the bad side of all that creative energy is that no one wants to listen to one another or adopt anyone else’s ideas. For example: some traditional financial industry leaders dislike considering personal values in an investment plan, and prefer to label the whole concept as “wokeness.” Then there are financial innovators who think new financial data unlocks a new realm of investment possibilities, and tend to think only in terms of “ESG.” Meanwhile, investors themselves might be looking for language that helps them find what they would view as “responsible” companies. Whose viewpoint should we be deferring to?
And then there is the ugly – the greenwashing. There is no shortage of fund sponsors and advice providers who want to sell you something you’re looking for, even if the product itself doesn’t suit your interests at all.
The Latest Attempt
Market leaders and investment trade groups have been trying to address the nomenclature problem for a long time. The most recent attempt came from a collaboration between the CFA Institute, GSIA (Global Sustainable Investment Alliance), and PRI (Principles for Responsible Investment). These three standard-setting organizations framed the problem this way:
“CFA Institute, GSIA, and PRI have long understood that inconsistent terminology hampers communication and contributes to the perception of greenwashing.”
So it does. The cohort responded with the following five “anchor” terms and definitions:
- Screening: Screening is another word for exclusionary investing, or what we call the Avoidance fighting style. It’s a core term for any investment strategy that will steer clear of certain companies or market segments based on agreed-in-advance rules.
- ESG integration: This term means that ESG data is used as an input into the company analysis and decision-making process, while ESG goals or impacts are not a consideration. The assumption here is that compelling non-financial data gives investors a broader picture and can help them identify companies that are better placed to pursue risk-adjusted returns. This term corresponds to our Rewarding fighting style.
- Thematic investing: Thematic isn’t a particularly easy term to understand, but it is used often within the investment industry. It simply means focusing your investment strategy on a particular market segment, concept, or trend. Some examples would be a fund that invests in renewable energy companies or those with female leadership.
- Stewardship: The group had an interesting definition for stewardship, which is their term for what we call the Influencing fighting style:
“The use of investor rights and influence to protect and enhance overall long-term value for clients and beneficiaries, including the common economic, social, and environmental assets on which their interests depend.”
In other words, this definition specifically ties investment values and personal values together, and defines them as being dependent on each other. It’s meaningful to see that tie be explicitly articulated in an industry definition.
- Impact investing: Their definition: “Investing with the intention to generate a positive, measurable social and/or environmental impact alongside a financial return.” No specific expectation is stated regarding where the balance between return and impact should lie.
Will It Take?
Short answer? Probably not.
Slightly longer answer: the committee focused on terms that are widely used and that have already evolved toward a consensus in their meaning. To be fair, that’s a good and appropriate starting point.
But it’s hard to get too excited, because the committee didn’t want to touch some of the many other terms that are tossed around. These include (but are not limited to):
- Sustainable investing
- ESG investing (as opposed to ESG integration)
- Faith-based investing
- Values investing
- “Woke” investing
- Socially responsible (or just responsible) investing
- Gender lens investing
Some of these terms can be folded under the committee’s preferred terms – for example, gender lens investing can be viewed as one type of thematic strategy. Others, such as values investing and woke investing, reflect the debate over how much personal values should be considered in an investing strategy. The committee punts on that issue, and perhaps that’s fair, but it leaves a big question mark at the heart of sustainable investing discussions.
Where to Next?
The CFA, GSIA, and PRI committee did a solid job of laying out what values-oriented investors are most likely to encounter when they search for strategies that suit their goals. But the conversation will have to continue. For our part, we think the repeated efforts at addressing this issue are a good sign, as it signals that the demand for sustainable strategies is extensive and persistent.
We are particularly interested in monitoring the underlying debate between those who think:
- Values should never be part of a traditional investment process
- Values should complement a traditional investment process
- Values should, at least sometimes, override traditional investment considerations
We think the middle path is sensible – an individual’s values and viewpoints are valid and should absolutely be part of the investment decision-making process. But financial well-being also remains essential.
That is why we have chosen “sustainable” as our word of choice. It reflects the desire to support businesses that make decisions based on enduring values. It also reflects the reality that our financial resources must sustain us and our families over time. In our view, sustainable investing captures an approach that is respectful, responsible, and productive – and more likely to build lasting financial strength.