If you’re new to ESG investing, you might need to brush up on some new lingo as well.
ESG investing comes with acronyms and terminology you may not be familiar with. Here are terms you might encounter when searching for ESG investments.
Corporate Social Responsibility (CSR)
CSR refers to a business model that includes positive social, economic or environmental practices. A company that engages in CSR works to make improvements to the world around them. For example, a company that includes charitable giving as part of its annual operations.
The amount of carbon dioxide emissions generated by a business or individual is called a carbon footprint. To lower its carbon footprint, a business might use less fossil fuels, use more renewable energy, or reduce the distance goods need to travel through their supply chain. A business can be called carbon neutral if it reduces its carbon footprint to zero.
Environmental, social and governance (ESG)
ESG investing could include environmental, social, or governance related investments, or just one or two elements.
Environmental (E in ESG)
ESG investing focused on the environment. It can include screening for companies that perform well on criteria such as low carbon emissions, clean technology, sustainable agricultural practices, and more. An example would be investing in companies that have a net zero carbon footprint.
The World Trade Organization (WTO) defines fair trade as a trading partnership based on dialogue, transparency, and respect, that seeks greater equity in international trade. This includes principles such as fair payment, gender equity, good working conditions, and respect for the environment.
Governance (G in ESG)
ESG investing that looks at corporate governance practices. It gives potential investors insight into the internal oversight of companies. Governance screening criteria could include board diversity, communications and transparency, executive compensation, or the existence of whistleblower protections.
Impact investing is a broader strategy that may include ESG investing. It is a way to invest in companies that create a positive impact on the world, socially or environmentally. It can be done in many ways, such as investing in companies creating new sustainable practices in energy or agriculture, or financing micro-loans in the developing world. It is similar to ESG investing, however, ESG investing relies on screening criteria that can rate investments either positively or negatively.
Investment managers use screening to evaluate how well a portfolio or specific investment asset aligns with ESG practices. Negative screening is a strategy that avoids specific industries, activities or products. An example would be excluding any stock in companies that rely on tobacco production. Another way of describing this process is exclusionary screening.
Positive screening selects investments which positively align with specific criteria. An example of positive screening would be actively seeking investments in renewable energy sectors or in corporations that only use renewable energy.
Both negative and positive screening can be used to evaluate ESG investments.
Choosing the strategy that works for you can help you clarify your ESG priorities.
Investors concerned with avoiding industries that are considered ethically or morally unacceptable typically avoid investing in sin stocks. This is a personalized definition that depends on the investor, but often includes industries like tobacco or weapons.
Social (S in ESG)
ESG investing with a social focus. It could include investors looking at the working conditions, diversity and equity in hiring, and fair wages of the companies they invest in. It can also include considering how a company engages with the community and other companies, such as Indigenous inclusion and reconciliation, ethical supply chain management and advocacy work for social good.
Businesses that generate profit while also helping environmental or social causes are called social enterprises. Generating revenue is seen as a necessary part of sustaining the business rather than the primary goal. Social enterprises are different than charitable organizations that typically rely on other sources of funding to sustain their operations.
Triple bottom line
The triple bottom line refers to a corporation’s environmental, social and economic impact. It has also been summarized as profit, people and planet. The term encourages investors and businesses to think beyond profit margins and measure success in terms of global well-being. This can help provide a more holistic picture of the impact of a company.
Many ESG investing terms are similar to each other. They all describe the impact of the investments or how they are selected to be part of an ESG portfolio. You could make note of the terms used to describe investments and look for ones that align with your own investing priorities.