According to the United Nations, which started the whole thing, responsible investment “involves considering environmental, social and governance (ESG) issues when making investment decisions and influencing companies or assets (known as active ownership or stewardship)”.
While the UN Principles for Responsible Investment (PRI) laid out the broad framework for the concept in 2006, the financial sector is still arguing about the details almost 20 years later amid a proliferation of ESG-related terminology.
However, a group of three finance industry bodies, including the PRI, is looking to settle the debate once-and-for-all with a new crisp set of responsible investment definitions they hope will be adopted as global standards.
The CFA Institute and the Global Sustainable Investment Alliance (GSIA) joined the PRI in producing the niche dictionary that breaks down the responsible word universe into five categories: screening; ESG integration; thematic investing; stewardship; and, impact investing.
“As practice has evolved and matured, CFA Institute recognized the opportunity to work alongside fellow global standard setters, PRI and Global Sustainable Investment Alliance, to bring greater clarity and harmony to our definitions of these investment approaches,” the joint publication says. “This effort is critical to ensure that professionals can communicate efficiently and effectively with each other, as well as investors and industry professionals across the market.”
Simon O’Connor, outgoing head of the Responsible Investment Association of Australasia (RIAA), said the re-definitions should help reduce confusion for financial market practitioners, investors and regulators in a world where ESG et al is now mainstream.
O’Connor said globally recognised responsible investment terminology would, for instance, likely reduce the risk of ‘greenwashing’ that has dogged regulators in particular over the last few years.
“Because responsible investment terms and definitions vary across markets, they have been used in an imprecise way, which leaves the industry open to claims of greenwashing,” he said.
Furthermore, O’Connor said a standardised lexicon would help investment managers with disclosure obligations by clearly defining how to evidence product claims around screening, ESG, impact, stewardship and thematic investing (such as sustainable strategies).
“Managers should be able to articulate and substantiate claims if they use these responsible investment terms,” he said. “The problems stem from not having clear definitions.”
But the joint publication, produced in response to a 2021 paper by the International Organisation of Securities Commissions (IOSCO), avoids defining common ESG product labels such as ‘sustainable’ or ‘ethical’.
Sustainable, ethical and other similar fund branding would be considered “overlays” to the five core responsible investment strategies, O’Connor said.
“We focused on defining the investment approach,” he said. “Hopefully, this also helps reduce the backlash against ESG – especially in the US – by highlighting that responsible investing is not a social agenda but a specific investment practice.”
O’Connor, due to end an 11-year term with RIAA, said the joint industry groups were hopeful IOSCO would endorse the standardised responsible investment guide.
IOSCO represents almost all global financial market regulators, often influencing a common approach to rule-making across jurisdictions.