Recently there has been a massive increase in popularity and interest in responsible investment. Key buzzwords within the sector include ethical, ESG, green, and thematic investing. However, the large amount of terminology can be incredibly confusing, so I have broken down all the key terms you need to know.
Responsible Investment
Responsible investment is often used as an umbrella term for all types of investment, including ethical, ESG, and green investment.
The UN’s Principles for Responsible Investment (PRI) defines responsible investment as a strategy and practice to incorporate environmental, social and governance (ESG) factors in investment decisions and active ownership.
PRI
Under the umbrella of responsible investing, there are many ways that you could invest your money responsibly. Some of these techniques will be discussed below.
You can read more about ESG here.
Ethical Investing
Ethical investing is the investment in shares, companies or stocks that align with your values. Ethical investing is personal and is determined by your own individual morals, values or religious beliefs. For example, ethical investing could include investing in companies with low carbon emissions or only in renewable energy companies. It could also involve investing in companies with excellent working conditions or good corporate governance.
Green Investment
Green investment is when you invest in companies that focus on mitigating the impact of climate change, biodiversity loss or environmental change.
Impact Investing
Impact investing is investing with the intention of creating positive and measurable social or environmental impact. The expectations in financial returns vary between impact investors. Some will invest in generating good financial returns and a positive environmental or social impact. In contrast, others will have lower expectations of the financial return of their investment.
Thematic investment
Thematic Investment is an investment in funds that fall under certain themes. When you invest in thematic funds, you usually are investing in a fund that groups together companies that fall under specific categories. Sustainable-related themes could include climate change mitigation funds, clean technology or healthcare.
Activist Investing
Activist investing involves investing in companies to push for change from within the company. This can often include strategies such as shareholder activism, where shareholders submit proposals at the company AGM on a specific topic. It can also include engaging with the company or leveraging your vote during the annual general meeting (AGM) season. Activist investing could be described as the opposite of divestment, which involves removing investment from a company in protest of their actions.
I hope this breakdown of the different types of investments that can be included under the responsible investment umbrella was helpful. Just a couple of things to note. Firstly, this list is not exhaustive. Secondly, it is also important to remember that I am not a financial advisor, and if you have any specific investment questions, you should speak to a financial advisor.
For more resources on investing and personal finance, both Girls that Invest and Female Invest are excellent resources.