Charity investment in a crisis: how to avoid greenwashing

As investor appetite for more responsible forms of investment grows, some investors might be confused by the array of choices on offer. The jargon used to describe different types of responsible investing has grown exponentially in recent years, leading some observers to describe certain labels as ‘greenwash’, or worse, potentially misleading to would-be investors.

While many asset managers claim to be truly ‘green’, ‘sustainable’ or ‘responsible’, it may be hard for investors to ascertain how they adhere to these monikers. Cambridge University’s Institute of Sustainability Leadership (CISL) lists nine separate types of responsible investment, which can be useful for gaining a better understanding of what each area offers. These are:

Ethical investment, which usually refers to the use of a ‘negative’ screen to exclude entire sectors or companies that are engaged in activities deemed unethical by the investor, or against a set of beliefs.

Socially responsible investing (SRI) is defined as an approach that applies environmental, social and governance (ESG) criteria alongside traditional financial measures when evaluating companies for investment.

Sustainable investment is defined as a portfolio composition based on a selection of assets that can be defined as being ‘sustainable’ or set up to continue into the long term.

Best in class (ESG) integration is defined as investment portfolios that actively select investments only from companies which meet the requirement of certain ESG criteria.

ESG integration is differentiated from best in class by more in-depth analysis of a company’s ESG credentials. Areas that ESG analysts may review include business model, product strategy, distribution system, research and development, and the human resources policies of a company.

Thematic investment can be clarified as a responsible strategy that falls under a specific investment theme. Examples could include water distribution, agriculture, low- carbon energy, pollution-control technology, health care and climate change.

Green investment seeks to invest in ‘green’ assets, whether via funds, companies, infrastructure or projects. This might include low-carbon power generation and vehicles, smart grids, energy efficiency, pollution control, recycling, waste manage- ment and waste energy, for example.

Impact investing is usually defined as investment that seeks a particular social or environmental objective, such as providing employment in a community, promoting access to low-carbon energy, or supporting minority- owned businesses or those employing people with physical or mental disabilities.

Shareholder engagement is defined as the influence that is brought to bear on a company by shareholders on ESG-related issues. Done effectively, engagement should influence companies to change behaviour and act more responsibly.

This article was written by Stephanie Smith, charity business development manager at Newton Investment Management, the sponsors of this article.

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