Introduction

The International Organization of Securities Commissions (IOSCO) has urged the investment industry to standardise sustainable finance-related terminology, including responsible investing, to ensure consistency globally. In response to this, the CFA Institute, Global Sustainable Investment Alliance and Principles for Responsible Investment (PRI) have collaborated to establish a more standardised approach to Responsible Investment. Their report, “Definitions for Responsible Investment Approaches,” provides clarification on the various responsible investment approaches.

Screening

Negative or exclusionary screening is the practice of applying a set of restrictions on ethical or similar grounds to limit investment opportunities and shape the investable universe of a portfolio. In contrast, positive screening involves selecting investments that have superior environmental, social, and governance (ESG) ratings or incur lower ESG risks than their peers. Finally, Best-in-class screening is relative comparative screening with certain alternative investments selected because they outperform their sector peers by a specified measure.

ESG integration

The report defines ESG integration as the practice of factoring ESG-related information into the investment process to magnify the risk-return profile of the investment. The report touches upon the analytical components of ESG integration, including quantitative and qualitative considerations, benchmarking, assessing materiality, and the evaluation of extra-financial factors. It also covers decision-making components, like asset allocation and portfolio construction. ESG factors that are not adequately reflected in asset prices can be identified and selected based on the judgement of portfolio managers.

Thematic investing

The report defines thematic investing as an investment strategy that aims to benefit from long-term secular trends such as climate change, demographic shifts, technological innovations, or resource constraints. This investment approach typically involves strategies such as active management of concentrated investments or collaborating with other investors to achieve scale and impact.

Stewardship

Stewardship involves engaging with companies to improve their ESG practices and governance issues. Stewardship includes activities like engaging with company management, voting proxies on behalf of clients, and otherwise advocating for changes to company policies or behaviours. Often, stewardship involves collaboration with other investors to increase its effectiveness.

Impact investing

Impact investing aims to generate measurable, beneficial social or environmental impact alongside an investment return. The report emphasises that an investor who engages in impact investing seeks to generate these benefits alongside the traditional goals of return in a soundly-managed investment.