Green finance: demystifying the jargon
Responsible, sustainable, ethical, green, divestment, ESG, SDG, positive impact…
With such a range of ethical finance buzzwords and acronyms being used interchangeably by the industry, it’s easy to get lost in the lingo.
It makes the world of responsible investing difficult to navigate. With so many concepts vying for your attention, how can you know which best fits with your own values?
The use of ethical finance terminology can be misleading. Historically, the industry has run largely on trust. Firms label their products as ‘ethical’ or ‘green’, but it’s down to individual investors to try to establish just how ethical the product really is.
Part of the issue here is a lack of common language. Investment product naming conventions need to be standardised to improve transparency. Without this, people are increasingly in danger of being hoodwinked by financial firms and advisers that are not quite as ethical as they would appear to be.
At Path, we sincerely hope that this year will see the end of greenwashing. With savvy investors demanding more clarity, the greenwashing that is so rife in the sector is finally being called out for what it is.
In the meantime, if you’re looking for ways to invest in a climate-conscious way, then getting to grips with the lingo is a good place to start.
With this in mind, here’s our handy guide to some of the most commonly used industry terms:
Divestment: the opposite of an investment. It means getting rid of stocks, bonds, or investment funds that are unethical or morally ambiguous. In particular, the divestment movement tends to concentrate on fossil fuels.
ESG (Environmental, Social and Governance): ESG criteria is a set of standards employed to measure the sustainability and ethics of a business. Environmental criteria are used to evaluate the impact a business has on the environment (such as its carbon emissions or levels of pollution); Social criteria addresses issues such as human rights policies and responsible employment practices, and Governance criteria refers to company best practice, such as its political contributions or shareholder rights.
Be aware that ESG merely screens out companies that are involved in controversial or damaging activities, but does very little in the way of analysing the ones that are left.
Ethical investing: a strategy where an investor chooses investments based on a personal ethical code. An ‘ethical’ investment screens out companies involved in harmful or exploitative activities such as alcohol, tobacco, armaments, gambling and pornography. However, polluting companies that cause damage to the environment are often seen as acceptable in ethical investment portfolios.
Impact investing: Impact Investing usually follows a framework where investments generate a return while also contributing to positive solutions for people and planet – our portfolios for example are aligned to the UN Sustainable Development Goals. Impact investing not only excludes companies that have a negative impact – the idea is to invest in companies that make a positive impact on the environment. Impact investors are choosing to invest in companies whose products and services directly contribute to solutions for people and planet. That means renewable energy, developing green technologies, sustainably managing forests, or applying innovative business models that combat climate degradation. At Path Financial, we focus solely on impact investment.
SDGs: The UN’s Sustainable Development Goals. This is a collection of 17 goals and 169 sub-targets set by the United Nations in September 2015. They are designed to be a “blueprint to achieve a better and more sustainable future for all.” Path is committed to these goals.
Socially Responsible Investing (SRI) (also often referred to as “ethical” investment)
Generally speaking, this is the highest level of screening where companies with negative social activities are excluded. Typically, such funds would not allow investments in companies where a significant part of its activities included: alcohol, tobacco, fast food, gambling, pornography, weapons, the military, or increasingly, fossil fuel production.
For a further glossary of terms as well as extensive information on pensions, savings, investments and retirement planning take a look at our Knowledge Base. If you’re in need of some further advice, get in touch with us for a chat.