A Quest for Common Language

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    Stockholm (NordSIP) – The lack of standardised and consistent sustainable finance-related terminology has long been the source of much frustration among investors. It is also a favourite topic for ESG sceptics to criticise and even ridicule. “It serves ESG advocates to keep the definition amorphous,” writes Aswath Damodaran in his latest critical opinion pieces in the Financial Times. Against this background, initiatives by well-respected global sustainability organisations to refine and harmonise the definitions for responsible investment approaches are more than welcome.

    On 1 November, the Principles for Responsible Investment (PRI), the CFA Institute, and the Global Sustainable Investment Alliance (GSIA) made their contribution to the cause, releasing their joint Definitions for Responsible Investment Approaches. Hopefully, the document should aid investors, regulators, policymakers, and other market participants to communicate with precision. According to the authors, the aim of the new resource is to harmonise existing terms and definitions – not create new terms or meanings.

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    “The growth of responsible investment brings with it increased expectations,” comments David Atkin, CEO of the PRI. “Part of that expectation centres on communication. Investors need language that enables them to communicate their responsible investment practices accurately, succinctly, and consistently. The PRI sees great value in partnering with the CFA Institute, Global Sustainable Investment Alliance, and others in the responsible investment industry to standardise terminology. By unifying around common definitions, we support our signatories and members to communicate with confidence,” he adds.

    Margaret Franklin, President and CEO of the CFA Institute, shares his conviction. “As practice has evolved and matured, CFA Institute recognised the opportunity to work alongside fellow global standard setters, PRI and Global Sustainable Investment Alliance, to bring greater clarity and harmony to our definitions of these investment approaches,” she says. “This effort is critical to ensure that professionals can communicate efficiently and effectively with each other, as well as investors and industry professionals across the market. We believe this work will serve as a valuable resource for CFA charter holders, members, and candidates, as well as participants and regulators of capital markets on a global scale.”

    The joint paper describes the concepts that define the five most common responsible investment approaches: screening, ESG integration, thematic investing, stewardship, and impact investing. Each approach gets its own dedicated section that includes a definition of the term, a list and explanation of the definition’s essential elements (the core concepts that are necessary and sufficient for defining it), guidance for using the term in practice, and the definitions that served as the primary inputs and reference points for this work.

    The authors are careful to point out that the agreed-upon definitions are not intended as a means of product labelling or categorisation. They also stress the fact that the approaches are not mutually exclusive and, in practice, are often used in combination.

    “We now encourage the global industry and regulators to adopt these definitions, particularly for developing labelling and disclosure standards that reduce confusion and provide our beneficiaries with greater clarity, consistency, and certainty,” urges Simon O’Connor, Chair of the Global Sustainable Investment Alliance and CEO of the Responsible Investment Association Australasia.

    Let us hope this latest addition to the plethora of sustainability definitions will lead to more clarity and improved communication, as intended.

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