You are not alone. It is useful to understand that different terms have evolved in different contexts to help explain the same set of practices.
Definition of Responsible Investing
Sustainable Investment, Responsible Investment (RI) and ESG-integration can generally can be used interchangeably and generally imply the same meaning, however with some differences in viewpoints as illustrated in the diagram further below.
The UN-backed Principles for Responsible Investing (PRI) define RI as:
“An approach to investing that aims to incorporate environmental, social and corporate governance (ESG) factors into investment decisions, to better manage risk and generate sustainable, long-term returns.”
RI can further be defined as investment management processes and ownership practices that take environmental, social and corporate governance (ESG) considerations into account in the belief that these factors can have an impact on long-term financial performance. Hence this tool also uses the term Responsible Investment and ESG integrated investment interchangeably.
The core objective of RI is to act in the best interests of ultimate beneficiaries such as pension fund members by recognising that ESG factors can create investment risks and opportunities. They must therefore be considered in all investment decisions.
It also means that pension funds should not be ‘absentee landlords’ with respect to the companies and other assets that they own.
Definition of Sustainable Finance
Sustainable finance has emerged as an overarching term to include a wide array of practices and concepts.
In May 2020, National Treasury published for public comment a draft technical paper: “Financing a Sustainable Economy”. It includes the following helpful definitions:
“Sustainable finance encompasses financial models, services, products, markets and ethical practices to deliver resilience and long-term value in each of the economic, environmental and social aspects and thereby contributing to the delivery of the sustainable development goals and climate resilience.
This is achieved when the financial sector:
- Evaluates portfolio as well as transaction-level environmental and social risk exposure and opportunities, using science-based methodologies and best practice norms
- Links these two products, activities and capital allocations
- Maximises opportunities to mitigate risk and achieve benefits in each of the social and environmental and economic aspects
- Contributes to the delivery of the sustainable development goals.
“Sustainable finance should therefore comprise the collective set of actions, processes, policy, regulations, goods and services that actors in the financial service sector give effect to in the enablement of the global Sustainable Development Goals or the closely-correlated National Development Plan 2030 (NDP), with consideration for the short, medium and long-term interests of South African citizens.”
Some additional terms are also in use, such as “ethical investment”, “socially responsible investment”, “social investment” and “impact investment”.
These terms are also evolving and used in different ways so don’t worry about understanding these terms immediately. Please see the Glossary for formal definitions of each.
The illustration below clarifies some of the important differences in the terminology.