Why Calls To Simplify Sustainable Investment Terminologies Are Heating Up

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Simplify Sustainable Investment Terminologies Are Heating Up  : Capital allocations towards sustainable investments have been on the rise, clocking record highs of over $18 trillion as of 2020. Millennial ESG investing has been one of the catalysts behind the increased capital allocation on this front. However, there have been calls for sustainable investing companies to address some of the barriers that could curtail growth going forward.

While the focus for the longest time has been on myths that continue to fuel skepticism about ESG investments, it is emerging that proliferation of terms referring to sustainable investments could be scaring would-be investors. If millennial interest in ESG continues growing, there needs to be alignment around sustainable investment terminologies and product names.

The financial industry has created a plethora of terms that are not helping to fuel ESG investing. Such terms have only made it difficult for private investors to feel what such investments are all about, forcing most of them to hold back on investments?

According to The Altruist League Managing Partner Ekaterina Chernova, “standardizing ESG investment terms will go a long way in supporting market development. Similarly, it should help address green washing concerns as well as reduce reputational risk.”

Simplifying sustainable investment terminologies should benefit investors by making it easy for them to understand various ESG investing aspects. It should also benefit regulators tasked with safeguarding investor’s interests and coming up with policies that govern the burgeoning capital markets segment. Besides, it should benefit financial firms and other key stakeholders with interests in the space.

Simplifying the terminologies will make it easier for the mass market to understand the purpose of investment, making it easier to support clients, supervise markets, and measure sustainable outcomes. The simplification is not the work of the sustainable investing company but the broader industry.

Similarly, some of the terms that need simplification include:

  • Responsible investment
  • Socially responsible investing/impact investing
  • Sustainable investing

Responsible Investment

Responsible investment, in this case, is defined as an investment approach that focuses on incorporating ESG factors into investment decisions to manage risk better and generate sustainable returns.

Socially responsible investing

Socially responsible investing differs from responsible investing in that it is an approach that seeks to combine financial returns with moral or ethical returns. Millennial impact investing has mostly been fuelled by the need to see ethical returns.

Sustainable Investing

In theory, sustainable investing is broader than responsible investing. It calls for investing in an asset class that generates long-term returns while also having long-lasting environmental, social, and governance impacts.

Lack of Clarity on Sustainable Investing Terms

It’s becoming increasingly clear that the use of various terms to describe various forms of sustainable investing only fuels confusion. The confusion has made it difficult for investors to compare investment products.

Similarly, it’s become difficult for investors to understand the various offerings issued by a sustainable investing company such as The Altruist League.

“The use of different terms relating to sustainable investing is brewing too much confusion. We need a simple yet common language to explain different terms and approaches to avoid misunderstanding and better guide respective parties,” said Milos Maricic, The Altruist League’s President.

Seemingly there are growing concerns that the confusion could negatively impact millennials’ interest in ESG, which has been rising in recent years. At worst, the confusion fuels greenwashing whereby investors are intentionally brainwashed by the sustainable investing company on being given false impressions.

A survey of 233 institutional investors concluded that a lack of agreement on terminology was the reason 50% of the firms refrained from pursuing sustainable investments. Also, more than 50% agreed that industry agreement on terminology would make responsible investing more accessible.

One solution to combating the confusion with the use of various terminologies is the grouping of terms around three or four categories. The groupings are distinguished based on their financial performance target and how the ESG impacts are achieved.

Exclusion Investments: The categorization calls for grouping those actively avoiding investing in unsustainable investment companies or countries.

Inclusion Investments: It’s a categorization for actively investing in sustainable corporates and countries based on underlying data.

Impactful investments: The categorization is for investors looking to have a direct positive, measurable impact on society

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