Ethical investing jargon buster

by Rachel Lacey from interactive investor |

We help you navigate your way through the maze of different 'investing for good' options.

The world of ethical investing is packed with buzz words and jargon. 

Check out our jargon buster to find out what some of the most commonly-used terms actually mean to help you get a better understanding of ethical investing and the funds you are considering.

Funds could use any number of the techniques or strategies described below.

Balanced-ethical: This describes funds that employ a range of ethical investment strategies. So, while they may rule out some stocks on ethical grounds, they will also actively seek out companies that are making a positive contribution to society or the environment. As such they will debate both the up and downsides of a business before they invest in it, taking a more open-minded approach to stock selection than some of the more traditional ethical funds.

Best in class: Rather than screening out companies based on strict ethical criteria, a fund with a 'best in class' approach won't rule out unethical sectors and will instead focus on firms with a better environmental or social track record than others in their peer group. This is a strategy that could be employed by a balanced ethical fund (see above).

Dark green: You may see ethical investments described in shades of green and it may not necessarily be related to its environmental credentials. A dark green fund will have very strict approach, avoiding any company or industry that does not meet its ethical criteria. This was the basis of the earliest ethical funds and usually involves excluding companies involved in mining, alcohol, tobacco, gambling, pornography and weapons or those operating in oppressive regimes.

Environmental/green investments: Some funds purely invest in companies that focus on ecology and the environment, as opposed to wider ethical concerns.

Environmental, social, governance (ESG): This is an acronym that you'll frequently come across when researching ethical investments and covers the three key core components of environmental concerns, issues around people and communities and governance – the ways in which businesses are run and managed.

Faith-based: Faith-based investments are designed to meet the specific needs of certain religious groups. The earliest ethical investment funds were designed for Quakers and Methodists by screening out issues including gambling, alcohol and tobacco. Islamic investors can also invest in funds that comply with Shariah law.

Impact investing:  This is an investment made with the intention of it having a measurable environmental or social impact in addition to simply generating a profit. Investments will seek to tackle challenges in areas including renewable energy, sustainable agriculture or conservation. Alternatively, they might seek to improve access to basic services including housing, education and healthcare.

Light green: (See dark green above). A light green fund is likely to have a more flexible investment approach, seeking out companies that are doing good (taking steps to protect the environment for example or improving conditions for workers) as opposed to excluding companies that are considered to cause harm.

Negative screening: (See positive screening below). A fund that has a negative screening approach rules out companies that don’t meet its ethical criteria. It might also be described as dark green (see above) and is a strategy used by funds that seek to do no harm. 

Positive screening: This is a strategy employed by funds that seek to do good – by searching out companies that are taking positive action, whether that is to improve or limit damage to the environment, engage with local communities or improve conditions for workers. Some funds may employ positive and negative screening (see above).

Responsible ownership or engagement: Some fund managers will seek to use their position as a shareholder in a company to drive change either through dialogue or by exercising their vote at annual or general extraordinary meetings (AGMs and EGMs). Issues managers will seek to engage with businesses on would include reducing damage to the environment, preventing climate change, encouraging equal opportunities, improving health and safety and protecting against bribery and corruption. They might also seek to tackle ‘fat cat’ salaries and issues around excessive remuneration.

Socially responsible investing/sustainable responsible investing (SRI):  This is a catch-all term used to encompass a wide spectrum of ethical investment strategies including social and environmental issues. Although the 'S' in this acronym initially stood for ‘social’ – implying a focus on 'people' issues, it's now more frequently seen to stand for ‘sustainable’ – reflecting greater interest in the environment and climate change.

Sustainable/sustainability: SRI Services describes sustainable as 'living, behaving, operating or investing in a way that does not risk damaging our long-term prospects or quality of life'. From an investment point of view it means identifying companies whose business is not risking our social and environmental wellbeing either now or in the future. 

Social: A fund that prioritises social issues will be looking out for companies that engage with local communities, look after their workforces and consider human rights.

Thematic investing: Some funds will have a thematic approach, investing in companies with a particular social or environmental theme such as water or renewable energy.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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