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July 7, 2021

Coming to terms with the terms.

Understanding all of the different names for investing can be confusing. We distil it down through our medals, but read on to hear more about the different ways of investing.

You are probably coming to learn there are various sustainable investing strategies out there and it’s not always easy to immediately distinguish the differences between them.

For example, “sustainable investing” is really a broad umbrella term that covers a variety of approaches.

You just need to figure out which approach best suits your financial and sustainability goals. Now we can’t tell you which one to choose, but we can run you through some of the main strategies out there.

All these themes and considerations are integrated into The Big Exchange’s own impact methodology which you can learn more about here.

Photo by Milan Ivanovic on Unsplash

ESG (environmental, social and governance) integration:

ESG integration is a general approach to investing that incorporates environmental, social and governance (ESG) considerations alongside traditional financial analysis.

- Broadly speaking, environmental factors include issues such as climate change, deforestation, biodiversity and waste management.

- Social factors include issues such as labour standards, nutrition and health and safety.

- Governance includes issues such as company strategy, remuneration policies and board independence or diversity.

ESG integration is about understanding the most significant ESG factors that an investment is exposed to, and making sure that you’re compensated for any associated risk.

Sustainable investing:

Although sustainable investing involves ESG integration, it takes things further by focusing on the most sustainable companies that lead their sector when it comes to ESG practices.

Both the ESG integration and sustainable investing approaches are about engaging with company management to make sure the firm is being run in the best possible way. This can mean challenging a company on its sustainability practices to encourage improvements where necessary.

Screened investing:

Screening is when you decide to invest, or not to invest, based on specific criteria.

Let’s say you only want to invest in companies that promote workplace diversity. Your criteria might be substantial representation of women and minorities in management-level positions, and/or the existence of diversity and inclusion policies.

You (or your fund manager) will use these factors to deliberately exclude investments that don’t meet these criteria (negative screening). Or they might purposefully include those that do (positive screening).

Ethical investing:

Ethical investing is an example of where screening is commonly used. Investors screen out investments that they deem unethical because they don’t fit in with their ethics or values (it’s also called values-based investing).

People commonly exclude so-called “sin stocks” such as alcohol, gambling, weapon manufacturing, tobacco or adult entertainment companies because they view these activities as immoral.

Impact investing:

Impact investing is about putting your money to work in a way that has a specific, measurable and positive benefit to society or the environment.

This isn’t to be confused with a charitable donation though. You also want to generate a return on your investment as well as promote social good.

Let’s say you’re passionate about education in Africa. You can put your money into a fund that invests in companies or projects that are working towards delivering quality education in African communities. Or you can invest directly in these companies or projects yourself.

Impact investing is more common in private markets (i.e. not the stock market). Recipients tend to be small companies with clear social goals that otherwise may not have access to capital.

Thematic investing:

You guessed it. This is about investing according to your chosen investment theme. Maybe your theme is “health and wellness”. In this case you’ll only want to consider funds that invest in healthy food brands or those companies focused on developing new vaccines.

Or perhaps your theme is “green investing”. If so, you’ll only invest in companies and technologies that are considered good for the environment (alternative energy generators or energy-saving technology manufacturers, for example).

The above is hardly an exhaustive list of the sustainable strategies available out there. But it should serve as a good starting point to help you understand the differences between some of the common approaches.

Content provided with support from Schroders Money Lens.

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