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Green Investing Language

Green Investing Language and Philosophy

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Regardless of the history of the terminology used when discussing green investing, the language used today has very specific connotations. To fully understand what goes into sustainable investing, you have to understand the green investing language.

ESG

ESG investing is a set of strategies that incorporates “the consideration of environmental, social and governance factors alongside financial factors in the investment decision-making process,” according to Granges.com. The term was first used in a 2006 UN Nation’s Principles for Responsible Investment Report.

Typically, these three factors receive significant weight in the asset allocation with an ESG investment strategy. These ESG metrics are also held relative to traditional financial measures. At the end of the day, an ESG investor looks at how environmental, social, and governance risks and opportunities affect profitability.

Though ESG is often mentioned in the same breath as green investing, it’s important to note that the E is just one piece of the puzzle. Environmental impact has certainly received great emphasis in recent years, but ESG investing is not necessarily the same as green investing when looking at, for instance, the overall composition of so-called ESG funds.

Socially Responsible Investing (SRI)

Unlike traditional ESG investing, SRI strategies make allocations based on qualitative factors typically tied to values. In theory, the strategy avoids funding companies causing more harm than good in a specified category.

Distinguishing it from other sustainable investment strategies, SRI resembles the divestment efforts tied to the anti-apartheid movement. Instead of seeking out companies that align with their personal values, investors will exclude companies from consideration based on conflicting values.

This strategy may be employed by an individual or by institutional investors hoping to directly push companies to adopt more sustainable policies and practices. It is also a tactic leveraged by activist shareholders. These shareholders work to ensure that the companies they have already invested in adhere to certain value sets. This may tie into a company’s policies and practices, but it may also be directed toward a company’s own investment portfolio.

With climate change weighing heavily on many investors’ minds, it is no surprise that many SRI investors often refer to green investing as a form of SRI. That is not an unfair association. If you are looking to invest green, though, you should remember that investments referred to as “socially responsible” may be tied to other social justice topics like politics, race, or gender.

Impact Investing

In contrast to SRI, impact investing specifically seeks out investment opportunities that directly correlate with the investor’s ethics instead of simply excluding those that run counter to them. The goal is to direct resources to areas where the money can do the most good while making a profit.

While financial considerations still play a role, the most significant element in making strategic allocations is the measurable impact an investment could have in an area where the investor would like to see social change. Allocation access points with impact investing also differentiate the strategy from SRI and ESG approaches. Instead of investing solely in public equities, investors might contribute to community development projects or poverty reduction initiatives.

Broadly speaking, impact investment is defined by four characteristics.

  • Intentionality means the goal of the allocation is to directly generate social good, often tied to the 17 Sustainable Development Goals advanced by the UN.
  • Investment with return expectations indicates the allocation is supposed to generate a financial return or the recoupment of capital, distinguishing it from charitable giving.
  • Range of returns and asset class exposure investments may provide a below-market return or target a risk-adjusted market rate supplemented by exposure to asset classes like fixed-income or index funds.
  • Impact measurement uses, in addition to financial returns, qualitative metrics associated with the defined goal. Such measures may include things like the number of schools built or the number of meals provided in a low-income neighborhood.

While individual and institutional investors may adopt an impact investing strategy for their portfolios, the term is most frequently used in relation to private equity funds. The relatively illiquid nature of the allocations made by the funds can be unattractive to some investors.

Green Investing

While green investing may be interchangeable with eco-investing or sustainable investing, its core function matters. It may best be understood as investment activities that involve conservation, alternative energy, clean air, and water, or other environmentally conscious goals.

To this end, a green investing strategy may incorporate elements of ESG, SRI, and impact investing, but its primary objective is environmental. Those seeking to implement a green investing strategy must acknowledge the distinctions in order to make informed allocations.

A green investing strategy is, therefore, less rigid than its definition. It may incorporate allocations to funds that prioritize ESG as a qualifying factor but would weigh the fund’s environmental impact above social and governmental considerations when comparing fund allocation options. It may exclude companies that actively contribute to environmental damage and then allocate those funds to companies with solid transition finance investments.

However, a green investing strategy is not the same as making green investments. As green allocations may be distributed among vehicles such as equities, fixed-income, and mutual funds, for example, one can gain green exposure as part of a broader investment strategy without fully adopting a green investing strategy.

This is part of what has attracted so many investors to green options. It satisfies the desire to make ethical investments while allowing them to design an investment strategy that best supports their goals.


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[Editors’ Note: To learn more about this and related topics, you may want to attend the following on-demand webinars (which you can listen to at your leisure, and each includes a comprehensive customer PowerPoint about the topic)]

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