Untangling sustainable investing terminology

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. Sustainable investing, as it grows in popularity, has also spawned a lot of terminology that can often be confusing. I'm here today with Jon Hale, he is our director of sustainable investing research, to untangle it.

Jon, thanks for joining me.

Jon Hale: Thank you.

Glaser: I don't know if I can actually list all of these or remember all of them, but we talk about sustainable investing, sometimes impact investing, ESG, SRI--all of these different terms, it become a bit of an alphabet soup. What do investors actually need to know? What are the important terms here?

Hale: You do hear a ton of these different terms. It kind of all started back in the day with "socially responsible investing," SRI. It's not used as often anymore. You still do hear the term. But I think just in terms of understanding what happened with all this is that this field has gotten considerably more complex and sophisticated in the last 10 years or so.

There's been a number of different terms that have kind of evolved to describe it. At the same time, what used to be known as "SRI," socially responsible investing, in 1980s, in 1990s, way back in the last century, it was a type of investing that was pretty niche-oriented. It didn't ever really take off. There were some issues with it, I think, from the standpoint of at least perceptions, that there was underperformance involved when you excluded primarily things from your portfolio that were products that you didn't like, for instance, and things like that, which kind of gave it not a very positive connotation among a lot of investors and particularly financial advisors. New terms can kind of take attention away from that. That's one thing, I think, has happened.

The other thing, the good news is that a lot of these terms are used pretty interchangeably. Some asset managers or advisors might use the term still "responsible investing" and other might use "sustainable investing" or "impact investing." Generally speaking, they are referring to pretty much the same thing.

Glaser: And what about "ESG?" That's one that comes up a lot, too.

Hale: ESG, it's interesting, because it refers to, really, in many ways the sort of process that's used to do what I call sustainable investing. It stands for environmental, social, and governance--governance meaning corporate governance. It's really about the use of a lens that includes environmental, social, and corporate governance issues that a company is facing to help analyze that company and determine whether it's a good investment or not.

Glaser: If all of these terms are mostly interchangeable, if investors hear one from one provider or another, an advisor or another, can they just go ahead and even out? Are there any kind of distinctions that are important?

Hale: One distinction is kind of important and that is that "impact investing" is sometimes something you hear out there. Impact investing started off as a way of describing, what I would actually call high-impact investments--investments that are not necessarily your equity fund or bond fund out there, but really targeted investments that have a high level of social impact in terms of their outcomes. That really is a small part of a portfolio and is something that mostly high net-worth investors engage in.

If I were going to use the terms though, what I would do is use "sustainable investing." If I'm an advisor out there, I'm thinking there's a lot of people out there that are interested in this field now. What should I refer to it as? I would use "sustainable investing" because it connects with this broader term "sustainability," which is I think what's driving most of the interest in the field. There are so many people out there today that kind of relate to that idea, both in their everyday life, in their jobs, certainly in their activities as consumers. It's just not a very big jump to say I can do that in my investing through sustainable investing.

Glaser: If you were to look into the future--I know this is always fraught with difficulty--would you expect that we are going to see more proliferation of terms or do you think there will be standardization around sustainable investing?

Hale: I think we'll probably see more consolidation around the term "sustainable investing." You'll hear "impact" as well. And in a way, I think they go together. I think one of the reasons why someone wants to invest sustainably is not just so that they can enhance potentially their investment return, but also so they can have an impact on things beyond their investment returns. It's the same reason why you would do that as a consumer. I think we are going to see those two things.

"ESG" will be around as kind of the description of how you do all this. I think "responsible investing" might sort of go by the wayside. I just don't think it has a great connotation either in terms of its history, plus it kind of puts people on the defensive if you are not interested in investing this way--are you being irresponsible? It's just one of those terms I just don't think is very resonant with people as opposed to "sustainable investing" and "impact."

Glaser: Jon, thanks for helping us untangle this today.

Hale: Thanks for having me.

Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.