The CFA Institute, the Global Sustainable Investment Alliance (GSIA) and the Principles for Responsible Investment (PRI) have set out harmonised definitions for five widely used responsible investment terms in a bid to improve communication in this area.

In a new paper, the organisations have also outlined a detailed explanation, essential elements, and guidance for using the terms in practice.

For example, the guidance stated that when communicating to general rather than professional audiences, investors should avoid the term “ESG integration” and instead “use plain language to accurately describe how ESG factors are considered in the investment process”.

The term “stewardship”, meanwhile, should not be used to refer to such activities as proxy voting and engagement ”unless these actions are undertaken to protect and enhance overall value for investors”, the guidance stated.

The paper is aimed at investors, regulators, policymakers and other market participants.

Countering confusion

The organisations said their collaboration was inspired by calls from regulators for voluntary standard-setters to develop common terms and definitions to ensure consistency throughout the global asset management and wealth management industries.

“The work to harmonise terminology also serves to deepen understanding of the nuances of responsible investment approaches,” they said.

“It counters confusion about what different responsible investment strategies seek to achieve by clearly differentiating the objectives of approaches, such as ESG integration and impact investing.”

The terms addressed by the three organisations, and their respective definitions, are:

  • Screening: the application of rules based on defined criteria that determine whether an investment is permissible;
  • ESG integration: ongoing consideration of ESG factors within an investment analysis and decision-making process with the aim to improve risk-adjusted returns;
  • Thematic investing: selecting assets to access specified trends;
  • Stewardship: 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 on;
  • Impact investing: investing with the intention to generate a positive, measurable social and/or environmental impact alongside a financial return.

In coming up with agreed terminology, the organisations have responded to shifts in the industry, for example updating definitions to reflect that responsible investment approaches can be applied to private as well as public markets, and to a range of investment styles and asset classes.

“The key is for these definitions to be widely promoted so that it becomes ‘bad practice’ to be misaligned with them”

Dustyn Lanz, senior adviser at consulting firm ESG Global Advisors

David Atkin, chief executive officer at PRI, said expectations for clear and transparency communication have grown significantly.

“Investors need language that enables them to communicate their responsible investment practices accurately, succinctly, and consistently,” he said.

“By unifying around common definitions, we support our signatories and members to communicate with confidence.”

Dustyn Lanz, senior adviser at consulting firm ESG Global Advisors, said the work was “a huge step forward for ESG and responsible investment” for reasons including that it “refutes any future claims that ESG terminology is not standardised or is ‘poorly defined’ for investments”.

As to the guidance’s ability to reduce greenwashing, he said “the key is for these definitions to be widely promoted so that it becomes ‘bad practice’ to be misaligned with them”.

For the PRI the conclusion of this work on terminology comes after it recently unveiled proposals for a new labelling system for its investor signatories, outlining an approach based on purpose and a second based on sustainability topics. This, too, is a response to intensified scrutiny of responsible investment claims

Two years ago the CFA Institute released voluntary ESG disclosure standards for investment products, a move partly spurred by problems created by non-standardised terminology.

GSIA publishes regular reports on the state of sustainable investment. Its next biennual review is due to be published this month.

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