Trio of industry groups standardise ESG definitions

The CFA Institute, Global Sustainable Investment Alliance and the Principles for Responsible Investment have jointly issued new guidance today (November 1) that aims to enhance consistency in responsible investment terminology.

The guidance paper defines five different approaches to responsible investment, namely:

• Screening: applying 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 positive, measurable social and/or environmental impact alongside a financial return.

Besides the definitions above, the paper includes a list and explanation of the definition’s ‘essential elements’, as well as guidance for using the term in practice.

“What we discovered is that it’s important to go into more explanation,” said Chris Fidler, head of global industry standards at CFA Institute.

“You can’t just have a word and a short little pithy definition, because all definitions are circular. You’re using words to define words, and words are ambiguous at the end of the day.”

“So we came up with a mechanism, which was to define the essential elements of each of these terms.”

For example, the essential elements of the term ‘screening’, which the paper then goes on to further explain, are:

• Applying rules
• Based on defined criteria
• That determine whether an investment is permissible

“These are the concepts that are necessary and essential to get the real conceptual grasp of what we’re talking about,” Fidler says.

“An example I’ve used in the past when I’ve been explaining this, is like the word ‘mortgage’. If you boil it down, there’s three important things about a mortgage: it’s a loan, it’s secured, by real estate. And we could then explain what each one of those things mean.

“If you understand what each of those concepts are, and you roll those all up, then you understand what a mortgage is. And if you omit one of those core concepts, then you might have an incomplete understanding of the word.”

According to the CFA Institute, the collaboration between itself, the GSIA and PRI was inspired by calls from regulators for voluntary standard setters to develop common terms and definitions.

The CFA Institute said the harmonised terms respond to shifts in responsible investing; and that previous versions of the definitions were, in some cases, specific to investments in listed companies.

Chloe Cheung is a senior features writer at FTAdviser