Impact Investing: The Lingo
/Impact Investing
is an investment strategy that seeks to create a positive social and / or environmental change while also generating a financial return. People interested in impact investing have expressed to us confusion over the many acronyms and terms used. This is our first post in a series on impact investing where we focus on demystifying the most common lingo.
ESG
stands for Environmental, Social and corporate Governance. The ESG factors were developed as a way to categorize areas of impact that can be measured and compared across companies and industries. The image below shows the categories that are covered in Environmental, Social and Corporate Governance. For example, you can invest in an exchange-traded fund (ETF) dedicated to Low Carbon stocks (CRBN) or Gender Diverse stocks (SHE) to name a few. In addition to investing for positive change, there are those that believe companies leading in ESG practices are more likely to have better long-term results. Arabesque, an investment firm, dropped Volkswagen from its portfolio before the emission scandal was disclosed because VW scored poorly on the Corporate Governance factor.
SDG's
are the United Nations Sustainable Development Goals. In 2016, the UN published a set of broad, global goals that are meant to be a guideline for governments, philanthropists, non-profits and others working towards positive change, such as impact investors. Some of the SDG's overlap with ESG factors, but SDG's are more broad-based goals.
SRI
stands for Socially Responsible Investing. SRI seeks to integrate non-financial factors into creating a portfolio, like impact investing, but the emphasis is on excluding stocks the investor considers to be unethical from their portfolio (divestment) versus investing proactively for positive change (impact investing). An example of an SRI strategy is to exclude investments in companies that produce or promote addictive substances or behaviors (such as alcohol, gambling and tobacco) from a fund.
Impact investing and SRI are often times used interchangeably. At the 2017 SRI Conference in San Diego, one of the speakers and veterans in the industry addressed this confusion with the audience and called for practitioners to stand behind one term, choosing Impact Investing as the preferred choice. The SRI conference is still called the SRI Conference, not the Impact Investing Conference, but it is an example of how the industry is evolving and working towards creating more clarity and transparency with the terminology.
Over the next few months, we will address impact investing myths, strategies and how to get started if you want to integrate an impact investing lens into your portfolio strategy. Don't forget to ask us a question regarding this or any other topic.
Linda Rogers, CFP®, EA, MSBA is the owner and founder of Planning Within Reach, LLC (PWR). Originally from New Jersey, Linda services clients throughout San Diego county and nationwide. She leads the design of PWR's investment portfolios which utilize broad, low-cost investments that integrate environmentally, socially, and governance (ESG) factors.
Planning Within Reach, LLC (PWR) is a fee-only and fiduciary wealth management firm offering one-time comprehensive financial planning, ongoing impact-focused investment management and tax preparation services in San Diego and nationwide. PWR is a woman-owned firm that specializes in busy professionals and impact investors. Planning Within Reach, LLC and their advisors do not receive commissions and do not hold any insurance licenses or brokerage relationships.