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A Glossary of Responsible Investing Terminology
Confused by all the buzzwords used in the field of socially responsible investing? You're not alone: there's a wealth of terminology to make distinctions among various approaches to adding non-financial criteria to investment decision-making. Here's a small glossary of some of the terms that pop up often.
CSR–The notion of Corporate Social Responsibility is based on the belief that business activity cannot be divorced from societal concerns. CSR criteria may vary from region to region because of cultural and religious values, among other variables.
Divestment–The sale of an investment because of ethical, moral, social or environmental objection to the sector or company. Divestment campaigns have targeted sectors from armaments to tobacco to alcohol and industries held to be responsible for activities threatening the environment. In some cases, divestment campaigns have identified entire countries for divestment, among them apartheid South Africa, the former Soviet Union, Cuba, Sudan, Iran, Israel, and Myanmar.
ESG Criteria–Environmental, Social, and corporate Governance criteria give investors and businesses additional metrics for evaluating their performance, and proponents of Responsible Investing argue that ESG criteria are an important element in the construction of investment portfolios. ESG incorporation strategies range from trying to rank potential investments in a business sector for ESG performance versus competitors to outright exclusionary screening that identifies companies and sectors as off-limits for any investment.
Impact Investing–Impact Investing requires investors to make decisions not only based on ESG criteria but also on the comparative impact that investment in a particular company or sector might have on advancing those criteria. Where Socially Responsible Investing (SRI) generally seeks to avoid investments in certain stocks (negative screening), Impact Investing looks to deploy capital into investments that are making positive contributions (positive screening).
Responsible Investing–This is an umbrella term that is used broadly to cover investment strategies that incorporate ESG criteria as a part of investment decision-making.
Shareholder Involvement–Shareholders may become activists for any number of reasons, many of them related to the competence of management. In the context of Responsible Investing, however, Shareholder Involvement often refers to shareholders attempting to use their voting power to require a business either to take actions, such as making changes in operations to reduce greenhouse gas emissions, or to refrain from taking certain actions, such as using corporate resources to lobby against regulation of greenhouse gases.
Sustainable Investing–This approach to investment focuses specifically on using investment decisions to encourage and support businesses that are moving toward goals of environmental sustainability as defined by scientific consensus. Proponents of Sustainable Investment, also known as Strategic Sustainable Investment, argue that corporations that move toward sustainability can improve long-term investment performance.
Values-based Investing–Not to be confused with "value investing" a traditional investment strategy that compares the price of shares with the intrinsic worth of a company, Values Based Investing simply involves investing only in companies that share one's values, however those values may be defined.