A landmark alliance in responsible investment

The landscape of responsible investment has long been as dynamic as it is diverse, with varying interpretations and practices surrounding ESG issues. However, a pivotal shift is occurring, bringing unity and clarity to the forefront of ESG investment strategies. Three titans of the responsible investment world – the Principles for Responsible Investment (PRI), the Global Sustainable Investment Alliance (GSIA), and the CFA Institute – have unveiled a collaboration. By presenting harmonised definitions for the five primary approaches to responsible investment, they aim to streamline understanding and implementation for investors across the globe. For asset managers, this is a development that marks progress and delineates a path forward in the intricate world of ESG.

Harmonised definitions: The five pillars of responsible investment

The coalition has crystallised into a set of five standardised approaches to responsible investment:

1. Screening: This foundational approach employs a set of ESG criteria to gauge the permissibility of investments. By establishing clear parameters, screening serves as a gatekeeper, ensuring that investments align with specific responsible investment mandates.

2. ESG integration: Unlike screening, which is a pre-investment filter, ESG integration is an ongoing process. It involves the meticulous consideration of ESG factors within the analytical and decision-making matrix, with the objective of enhancing risk-adjusted returns over time.

3. Thematic investing: Here, investors pinpoint assets that align with specific ESG trends, focusing on themes that have the potential to drive future performance and align with broader sustainability goals.

4. Stewardship: Defined by influence and engagement, stewardship involves leveraging investor rights to safeguard and augment long-term value, not just for individual clients but also considering the shared social, economic, and environmental frameworks in which they operate.

5. Impact investing: Aligned with the principles outlined by The Global Impact Investing Network, this approach is characterised by a dual-purpose goal: generating a tangible, positive impact on society and/or the environment, while also delivering financial returns.

Significance for asset managers

The unification of ESG terminology spearheaded by PRI, GSIA, and the CFA Institute embodies a significant step toward resolving the ESG market’s complexity. This harmonisation dispels the contention that ESG terminology is vague or “poorly defined”. It equips investment professionals and regulators with a definitive lexicon to reference, potentially instilling unprecedented clarity into the market.

Asset managers now have access to a shared language and framework that can underpin investment strategies, foster clear communication with stakeholders, and streamline reporting practices. By adopting these standardised definitions, asset managers can significantly reduce instances of greenwashing, enhancing the integrity and authenticity of their responsible investment claims.

The joint effort of the world’s leading responsible investment associations is a great stride towards a unified, transparent market. As these definitions are embraced and woven into the fabric of investment practices, they promise to streamline processes and enhance the credibility and effectiveness of responsible investment strategies globally.

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