By Sebastian Elwell, Founder – Switchfoot Wealth
Want your money to do some good in the world? Excellent! Choosing investments and pensions that align with your values is one of the most powerful positive steps you can take for people and planet.
But there are so many buzzwords out there – “ethical”, “sustainable”, “ESG”, “impact”, “green”, “eco”, “responsible”… – where do you start?
How do you distinguish between them and figure out where your money is really being invested? You’re not an investment banker (presumably) – just someone who needs an easy way to make a decision you’re happy with.
This article is here to help you out.
But first – let’s define what’s going wrong.
The Problem: Poorly-Defined Terms
The truth is, many of the ethical investment and pension “buzzwords” are really just that – “buzzwords”. They’re often used without being tied to any specific definition.
Funds carrying labels like “ethical”, “impact” or “sustainable” are often using broad brush strokes to tap into investor demand. It’s not that providers are misleading investors, but they’re not being particularly clear either.
Where it becomes particularly tricky is distinguishing between these options.
Is “impact” better than “sustainable”? How does “green” compare to “ethical”? There’s no rating system and it’s hard to draw clear comparisons. (Actually, it’s more ‘impossible’ than ‘hard’.)
No wonder investors get confused.
What Do The Buzzwords Mean?
OK – so, we get that definitions aren’t always crystal clear, but let’s do our best to make a few basic definitions:
ESG Investing
ESG stands for “environmental, social and governance.” So, it considers companies’ environmental, social, and governance factors when making investment decisions, it is a risk lens to view investments through and a tool for fund managers and analysts.
Ethical Investing
In every day parlance – You might think this is a broad term that describes choices that consider ethical values as well as financial returns. This could include the impact a business has on society, or the types of activities they are engaged with (perhaps not weapon manufacture or tobacco, for example.) However, in investing it has a more specific meaning the application of a negative screen for ethical reasons e.g. I will not invest in company X or sector Y.
Impact Investing
This is quite a proactive term, with the aim of ensuring investments are delivering some kind of measurable positive environmental and/or social outcome alongside financial returns. Real world impact must be identifiable.
Sustainable Investing
Sometimes refers to balancing traditional investing with ESG insights. But often is also more related to the nature of businesses, such as those involved with sustainable agriculture, renewable energy or lower carbon activities.
Green Investing
This is an incredibly vague piece of terminology that is nonetheless widely used in the industry.
All the above is caveated, however, with the note that definitions are not universally agreed, and many continue to be used loosely or interchangeably.
However, there’s some good news…
Good News: Clearer Terminology (UK)
In the UK, the FCA (Financial Conduct Authority) have addressed the problem of unclear terminology with a set of rules called the Sustainability Disclosure Requirements (SDR.)
These rules make two interventions:
- Prohibits use of “sustainable”, “impact” and other similar terms in fund names, unless using a defined label
- Sets out four product labels that funds can voluntarily apply
The new SDR labels will certainly represent a significant step forward for investors seeking clarity, though they will still take a little extra effort to understand.
The FCA defines the four labels as follows:
- Sustainability Focus: these funds invest mainly in assets that focus on sustainability for people or the planet. Examples may include activities to support the production of energy, for example, from solar, wind or hydrogen.
- Sustainability Improvers: these funds invest mainly in assets that may not be sustainable now, but aim to improve their sustainability. Examples may include investments in companies that are on a credible path to net zero by 2050, or are committed to improving social standards such as human rights.
- Sustainability Impact: these funds invest mainly in solutions to sustainability problems with an aim to achieve a positive impact for people or the planet. Examples may include renewable energy generation and social housing.
- Sustainability Mixed Goals: these funds invest mainly in a mix of assets that either focus on sustainability, aim to improve their sustainability over time, or aim to achieve a positive impact for people or the planet. Examples may include a mixture of investments from the labels above (Focus, Improvers and Impact).
Our Opinion: Making “Sustainable” The Default
At Switchfoot we want to help our clients make investments that are good for people and planet.
As we’ve seen, terminology can be unhelpful (at best), or downright confusing when deciding where to invest your money.
But even beyond that, there’s something we think needs to happen if we’re going to address the really big challenges facing the world.
In our opinion, Sustainable investing has to become the default option, not the alternative option.
Investors like you shouldn’t have to navigate complex and confusing terminology just to make the “right” choice. If sustainable investments were the default choice, it wouldn’t require any extra effort on investors’ part to seek out or switch to them.
Why should the onus be on providers offering sustainable investments to accurately ‘label’ them, when the same criteria isn’t put on those offering investments that really aren’t sustainable at all.
This is a big shift, and one that we know will require system change. It’s part of our Sustainable Financial Planning methodology, and why we actively engage with partners, regulators and even competitors to share our thinking.
Frankly, it will be hard work. But we think it’s important.
Want to get started?
If you’re considering how your money can do good in the world, you’ve already taken an important positive step. And, by educating yourself regarding key terminology, you’re equipping yourself to make a choice you’re really happy with.
At Switchfoot Wealth we can support you on this journey – so feel free to contact us.
Whoever you invest with, though, you should absolutely interrogate what they’re offering beyond the sustainable buzzwords. It’s something that all of us can do to make a positive difference.
By Sebastian Elwell, Founder – Switchfoot Wealth
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Important Note: Buying Investments can involve risk. The value of your Investments and the income from them can go down as well as up and is not guaranteed at any time. You may not get back the full amount you invested. Information on past performance is not a reliable indicator for future performance.
