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Understanding investment terminology | North Bay Nugget


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In his 2001 letter to investors, Warren Buffett wrote, “Bad terminology is the enemy of good thinking.”

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The asset management industry suffers from this affliction more than most and in particular in the area of responsible investing. Modern responsible investing was first started in the 1970s, and the number of buzz words and acronyms used to describe the space has expanded and changed over the years.

This article is meant to hopefully provide some clarity within this rapidly expanding investment style.

Responsible investing means many things to many people. There is no type of investing that is more personalized to the individual investor’s beliefs, world view, and values.

The following is a small sample of the terms that fall within the responsible investing umbrella:

  • Socially responsible investing (SRI),
  • Environmental, social, and governance (ESG),
  • Impact investing,
  • Fossil fuel-free investing,
  • Values-based investing,
  • Sustainable investing, and
  • Mission-related investing, to name but a few terms.

Discussing what prospective investors mean when they say they want to take a responsible approach is a very important first step.

I have chosen to focus on the difference between SRI, ESG, and impact investing given the limited space I have to work with. Below is a general discussion between these categories, but it is by no means the only way these terms are used.

Simplistically, SRI, is what many investors incorrectly think of when they hear the term responsible investing. SRI started as the umbrella term for all types of responsible investing, but in the modern nomenclature it is generally used as the term for negatively screened portfolios, which is one type of responsible investment.

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Values-based investing and fossil fuel-free investing are examples of SRI portfolios. An individual or organization may not want to invest in companies that engage in certain activities, such as weapons manufacturing, alcohol production, or the extraction of fossil fuels, so they are removed from consideration.

ESG investing recognizes that these factors play a material role in the potential risk and return of an investment. Issues like climate change, resource depletion, labour conflicts, health and safety of employees, and executive compensation are examples of issues considered.

Some responsible managers will engage or interact with portfolio holdings to try to elicit a change of the company’s behavior on those ESG issues. Engagement is defined as, “The process through which investors use their influence to encourage companies they invest in to improve their management of ESG issues. This may, in turn, improve the companies’ financial performance and the long-term performance of investment portfolios.”

Impact investments on the other hand are made with the intention of generating social and environmental impact with financial return being second in importance. This may include considering elements of SRI, ESG, or both. These investments combine some of the attractive elements of philanthropy and market investments and allow investors to integrate their values into their investment strategy while still receiving a market return. Foundations and endowments are able to use impact investing to align their holdings with their mandate through mission-related investing in this manner.

Mike Candeloro, senior portfolio manager and wealth advisor with RBC Dominion Securities and the head of The Mike Candeloro Wealth Management Group supplied this article. RBC Dominion Securities Inc. and Royal Bank of Canada are separate corporate entities, which are affiliated. Member CIPF. Mike can be reached at www.michaelcandeloro.com or at michael.candeloro@rbc.com



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