Demand for funds which cherry pick investments with strong environmental, social or governance (ESG) credentials has surged in recent years.
Many of these funds include terms such as 'ethical' or 'impact' in their names. But what do these words actually mean?
Below is a glossary of the key terms often used to describe investment styles and processes.
The most commonly used process, including across funds with no specific sustainability objective, ESG integration is where ESG-related factors are systematically considered as part of the investment analysis conducted by a fund manager as a way to better manage risk and returns.
While all forms of investing in theory have 'impact', for good or ill, funds which carry the label look to ensure the positive impact is measurable. For example, by investing in projects where the financial return is linked to improving literacy rates or health outcomes in the developing world.
Often used in index-tracking funds, a 'positive tilt' approach would see a fund buy more of the stock of companies in a given index with a good ESG performance, for example on carbon emissions, and less of those with a worse performance.
When words are not enough, fund managers can turn to the ballot box. Specifically, anyone who owns shares in a company has the right to vote once a year on a range of issues including whether or not to confirm the board in their jobs, and to support their proposed pay and bonus plans. In a mutual fund, where many thousands of people may share ownership, the fund manager or the fund management company running the fund decides which way to vote on their behalf.
Our Standards: The Thomson Reuters Trust Principles.