Views on improving the integrity of global capital markets
09 November 2023

Words Matter: Standardizing Responsible Investment Terminology

The following is derived from “Definitions for Responsible Investment Approaches,” the new guidance from CFA Institute, the Global Sustainable Investment Alliance (GSIA), and Principles for Responsible Investment (PRI).

The beginning of wisdom is to call things by their proper name.” — Confucius

Innovation often comes with new words and terminology, and developments in responsible investment are no exception. As people strive to communicate new responsible investment concepts and strategies, they sometimes use different words to express similar ideas or the same words to express different ones. This has led to confusion, particularly around five key responsible investment approaches:

  • Screening
  • ESG integration
  • Thematic investing
  • Stewardship
  • Impact investing

That’s why the International Organization of Securities Commissions (IOSCO) issued a call to action challenging global volunteer standard setters to develop common sustainable finance-related terms and definitions. CFA Institute, the Global Sustainable Investment Alliance (GSIA), and Principles for Responsible Investment (PRI) answered IOSCO’s call and teamed up to harmonize our definitions of these critical responsible investment concepts.

Banner for CFA Institute ESG Investing Certificate

While responsible investment has changed in many ways over the decades, its distinguishing feature — the overlay of a normative framework that establishes a particular notion of responsibility — has remained ever constant. But the meaning of responsibility varies from one person to the next, and thus responsible investment may include aspects of sustainability, fiduciary duties, morality, or some combination thereof.

Until about 10 years ago, responsible investment was a niche interest whose main focus was avoiding industries, such as tobacco or gambling, that clients judged to be morally objectionable. As its appeal grew, however, new thinking and approaches emerged. Today, market participants apply a variety of responsible investment strategies, including the five above, individually or in combination, even if what they entail isn’t always clear.

Inconsistent responsible investment terminology creates three problems:

  1. Clients and especially retail investors have a harder time understanding what a fund or strategy is offering. For example, a client may believe that an “ESG Integration” fund’s portfolio of investments will contribute positively to society, but in fact the manager may simply evaluate ESG information as part of the investment analysis process. As a result, the client might select a product that is ill-suited to their objectives.
  2. Inconsistent terminology can create legal, compliance, and reputation risk for asset managers. Terms with multiple meanings make miscommunication more likely among internal teams and between an asset manager and its clients, partners, and regulators. As several recent regulatory enforcement actions demonstrate, such miscommunication can sometimes rise to the level of misstatement or misselling.
  3. It makes writing and enforcing rules more difficult for regulators. When asset managers describe similar practices using different terms, or different practices using the same terms, regulators may not fully understand what managers are doing and not be able to respond with an appropriate regulatory policy. If inconsistent terminology also makes its way into regulations, those regulations could be unclear to market participants and thus less effective.

Global leaders standardize definitions for greater consistency.

The jointly published resource from CFA Institute, GSIA, and PRI supports regulators, asset managers, and end investors alike by aligning our definitions and providing detailed explanations and practical guidance for using these terms. It creates a common language for regulators to reference when developing standards to improve market integrity and for asset managers to communicate their responsible investment practices with accuracy and precision, thus facilitating more-informed investment decisions by their clients. By establishing clear and consistent technical terminology, it will increase trust and efficiency in the marketplace.

Client needs will continue to evolve, and the industry will continue to innovate, but these five responsible investment approaches have matured to the point where it is time to call them by their proper names. 

CFA Institute, GSIA, and PRI encourage our members as well as regulators and market participants at large to follow our lead.

For more on responsible investment terminology, don’t miss “Definitions for Responsible Investment Approaches.”

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.

Image credit: ©Getty Images/ RapidEye

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About the Author(s)
Nicole Gehrig

Nicole Gehrig is a director of Global Industry Standards at CFA Institute. She is responsible for the research, development, and promotion of ESG codes and standards. Prior to joining CFA Institute in 2022, she worked at PGIM Fixed Income for 15 years, most recently as an ESG specialist. In this role, she contributed to the development of the proprietary ESG ratings framework, ESG investment policies and processes, and ESG product development. Previously, Gehrig held management positions in product pricing, marketing research, and performance measurement. She received a BS in finance from the University of Delaware and an MBA in finance from Fordham University.

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