Is ESG investing the same as responsible investing and sustainable investing? If you have opened a newspaper recently then the answer seems to be yes.
A US article published in January stated that ESG investing, “…involves environmental, social and corporate governance parameters that allow investors to select companies that seek solutions to the world’s challenges while delivering returns similar to traditional investments.”
Investopedia describes ESG investing as, “focusing on companies that support environmental protection, social justice, and ethical management practices.”
Even OpenAI’s ChatGPT, when asked, “what is ESG investing?” responded, “…also known as sustainable investing or socially responsible investing (SRI), it is an investment approach that considers environmental, social, and governance factors in addition to financial criteria when making investment decisions.”
Clarifying approaches
CFA Institute believes differently and the following excerpt from our Certificate in ESG Investing curriculum makes the differences clear:
“ESG investing is an approach to managing assets where investors explicitly incorporate environmental, social, and governance (ESG) factors in their investment decisions with the long-term return of an investment portfolio in mind….ESG investing is concerned with how ESG issues can impact the long-term return of assets and securities, whereas other responsible investment approaches can also take into account non-financial value creation and reflect stakeholder values in an investment strategy.
“Responsible investment is a strategy and practice to incorporate ESG factors into investment decisions and active ownership. It considers both how ESG factors might influence the risk-adjusted return of an asset and the stability of an economy and how investment in and engagement with assets and investees can impact society and the environment.
“Sustainable investment refers to the selection of assets that contribute in some way to a sustainable economy—that is, an asset that minimises natural and social resource depletion.”
See also: – What it’s like to take the CFA Certificate in ESG Investing
Responsible investing considers both the outside-in view of how ESG risks and opportunities might influence returns and the inside-out view of how investments might affect the environment and society. ESG investing focuses on the first element, and sustainable investing focuses on the second.
We can even make a more fundamental distinction. ESG investing pursues economic objectives. Responsible investing and sustainable investing—along with ethical investing, impact investing, faith-based investing, and values-based investing—pursue both economic objectives and ethical objectives.
Aligning with values and seeking to maximise positive impact are both ethical objectives. The former is rooted in duty-based ethics, which argues that certain actions are morally required or prohibited regardless of consequences. The latter is rooted in consequence-based ethics, which argues that actions are neither inherently good nor bad; actions are good or bad depending on whom is affected and how.
The knowledge and skills that comprise the field and practice of ESG investing are applicable to any fund or strategy that seeks positive risk-adjusted returns. Consequently, the practice of ESG investing is appropriate for both responsible investing approaches and other forms of investing that have both economic and ethical objectives.
In practice, this means conducting appropriate research and investigation of all material information relevant to their investment analyzes and portfolio management decisions, recommendations, or actions.
Similarly, our positions on ESG integration explain that “this requirement includes the integration and consideration of material ESG information, in other words, material ESG factors are an important component of a complete and thorough financial analysis for any actively managed investment portfolio”.
ESG integration
Another area ripe for confusion is ESG integration, specifically how does it differ from ESG investing? In our Certificate in ESG Investing curriculum, we define ESG integration as “the inclusion of ESG considerations within financial analysis and investment decisions”. ESG investing is a broader term that allows for consideration of ESG factors in both the investment process and ownership activities.
Some might question whether ESG investing is simply investing. It is, in the same way that fundamental investing, growth investing, and index-tracking investing, for example, are simply investing.
See also: – Hierarchy of sustainable investing for financial advisers
This is not to say that ESG investing is a comprehensive investment strategy, but it is an area of investment practice. Given that ESG investing can be seen as an extension or enhancement of traditional investing, we understand why some people see no need for a specialized term.
But as a professional credentialing organization, we find it necessary to have terms that denote different areas of practice that require different knowledge and skill sets.
Finally, there are legitimate questions and criticisms of ESG investing. It’s important that we explore and debate these, but let’s please ensure we’re actually talking about ESG investing and not something else.
