In recent years, many people have formed opinions both positive and negative on ESG investing.

But do they actually know what it means?

Three financial organizations have put their heads together to come up with standardized definitions for sustainable investing terms.

The new guidelines were developed to try simplify the sometimes complex and confusing world of investing for those who want their money to have a positive impact on the planet.

“Words matter. It is important that we all speak the same language” when dealing with responsible investing, Chris Fidler, head of global industry standards at CFA Institute, said in an interview. “We wanted to arrive at a consensus about the meaning of words used in responsible investing. The guide is designed for use by a number of groups, including financial advisors.”

"Technical terminology is an important part of professional practice,” Marg Franklin, president and CEO at the CFA Institute, said in a statement. “New terms are always emerging alongside new ideas, and definitions evolve over time.  It's important to standardize terms and definitions as practices mature so that professionals can communicate efficiently and effectively with each other as well as with clients, regulators, and other market participants. We believe this work will serve as a valuable resource for CFA charter-holders, members, and candidates."

In addition to the CFA Institute, a global association of investment professionals, the guide was produced by the Global Sustainable Investment Alliance, which is a global collaboration of sustainable investment membership-based organizations, and the United Nations-supported Principles for Responsible Investment.

The collaboration that created the “Definitions for Responsible Investment Approaches” was inspired by calls from regulators for voluntary standard setters to develop common terms and definitions to ensure consistency throughout the global asset management and wealth management industries. Promoting the consistent and precise use of terminology contributes to efforts to address greenwashing, which is fraudulent efforts to appear to be sustainable and responsible investments, the organizations said.

If people do not mean the same thing when discussing sustainable investing, clients may not get what they want, Fidler said. The definitions have a better chance of being adopted because three important organizations are supporting them.

The terms being defined are:

  • Screening: The application of rules based on defined criteria that determine whether an investment is permissible.
  • ESG integration: Ongoing consideration of ESG factors within an investment analysis and decision-making process with the aim to improve risk-adjusted returns.
  • Thematic investing: Selecting assets to access specified trends.
  • Stewardship: The use of investor rights and influence to protect and enhance overall long-term value for clients and beneficiaries, including the common economic, social and environmental assets on which their interests depend.
  • Impact investing: Investing with the intention to generate a positive, measurable social and/or environmental impact alongside a financial return.1

The work to harmonize terminology also serves to deepen understanding of the nuances of responsible investment approaches. It counters confusion about what different responsible investment strategies seek to achieve by clearly differentiating the objectives of approaches, such as ESG integration and impact investing, the organizations said. The resource clarifies and harmonizes existing terms and definitions and does not create new terms or meanings.

"For many years, our organizations have been working to define and clarify the language of responsible investment,” Simon O'Connor, former chair of the Global Sustainable Investment Alliance, said in a statement. “This foundation of experience and expertise enabled us to come together with a common purpose to clarify and harmonize these definitions on a global scale. We now encourage the investment industry and regulators to adopt these definitions to create greater consistency.”

David Atkin, CEO at Principals for Responsible Investment, added in a statement, “Responsible investment has grown significantly, and so have the expectations for clear and transparent communication. Investors need language that enables them to communicate their responsible investment practices accurately, succinctly, and consistently. By unifying around common definitions, we support our signatories and members to communicate with confidence."