To bring more consistency to discussions about sustainable finance in the money management industry and prevent greenwashing, the CFA Institute, the Global Sustainable Investment Alliance and the Principles for Responsible Investment published updated definitions for five terms relating to responsible investing.
In a Nov. 1 report, the three organizations gave updated definitions with explanations for the terms screening, ESG integration, thematic investing, stewardship and impact investing. They also provided guidance on how to use the terms.
Screening is "the application of rules based on defined criteria that determine whether an investment is permissible," according to the report.
For instance, one may conduct a screening for investments from issuers who received a certain score from a ratings provider that specializes in human rights performance.
ESG integration is defined as the "ongoing consideration of ESG factors within an investment analysis and decision-making process with the goal of improving risk-adjusted returns." The report noted that the consideration of ESG factors does not imply that such factors are given more or less consideration than other types of factors in the investment process.
Thematic investing is defined as the selection of assets to access specific trends, such as healthcare, clean technology and climate change mitigation.
In the context of responsible investing, stewardship is the "use of investor rights and influence to protect and enhance overall long-term value" on economic, social and environmental assets for clients and beneficiaries, according to the report.
Lastly, impact investing is defined as having "the intention to generate a positive, measurable social and/or environmental impact alongside a financial return," but only if there is credible proof of an investment's contributory impact.
Margaret Franklin, CEO and president of the CFA Institute, noted in a joint news release that since new terms are always emerging and definitions evolve over time, standardization is important so "professionals can communicate efficiently and effectively with each other as well as with clients, regulators, and other market participants."