As the ‘Sustainable and Responsible Investment’ industry has grown and evolved, its sophistication has increased greatly such that twenty-one distinct SRI strategies can now be identified:
- Ethical 'negative' screening – refers to the screening of companies on ethical, moral or religious grounds (such as contraception, lending at interest or animal testing).
- Shariah screening – is a sub-category of ethical screening which is guided by Islamic principles that lead to avoidance of activities that are ‘Haraam’ (forbidden) such as alcohol and pork or exposed to ‘Riba’ / usury (interest payment in the lending or accepting of money). (See Note 1 below)
- Environmental/social 'negative' screening – relates to the removal of companies or sectors from an investment universe for falling short of any absolute environmental, social or economic standards. (Such screening may remove companies exposed to activities such as nuclear power, pornography or tobacco manufacture.)
- Norms-based screening – is a sub-category of env/social negative screening which involves excluding from portfolios, companies (or government-debt) on account of any failure by the issuer to meet internationally accepted ‘norms’ such as the UN Global Compact, Kyoto Protocol, UN Declaration of Human Rights etc.)
- Positive screening – involves the active inclusion of companies within an investment universe because of the social or environmental benefits of their products and/or processes. (For example, all water companies may be included in a universe on account of the social benefits of clean water supply and the environmental benefits of wastewater treatment.)
- Best in Class – is a comparative investment style that involves investing only in companies that lead their peer groups in respect of environmental and social performance (under this approach, only a proportion of water companies may be included within an investment universe as only a proportion can be the ‘best’).
- Financially-Weighted Best in Class – is an investment style that incorporates financial (as well as economic, social and environmental) factors into the ‘best in class’ decision-making process – and gives weight to the sustainability aspects that are most likely to impact financial performance.
- Corporate governance (active) – involves the proactive execution of the general rights and responsibilities of share ownership. Practical execution typically involves (but is not limited to) the execution of voting policy.
- Constructive engagement – involves investors encouraging company management to improve the impact that they have on society and / or the environment through a process of research and dialogue
- Shareholder advocacy – is a more confrontational form of engagement, whereby investors use their shareholdings to submit resolutions to company AGMs and sometimes launch public campaigns against specific corporate practices.
- Sustainability theme investing – involves investment in companies exposed to industrial trends that arise from the pursuit of sustainable development (e.g. investment in renewable energy companies, water treatment companies, education providers etc).
- Alternative / renewable energy investment – is a sub-category of sustainability theme investing that involves targeted investment in renewable and alternative energy companies.
- Integrated analysis – fundamental approach – is an investment style in which fundamental analysis of environmental and social issues is used to adjust forecasts of key stock price drivers, to identify additional sources of risk and opportunity and, thereby, to contribute to better overall investment decision-making.
- Integrated analysis – quantitative approach – is an investment style that uses statistical methods to establish a predictive correlation between the sustainability aspects of a company’s performance and financial factors and to apply the resulting ratio to manage stock portfolios on a quantitative basis.
- Integrated analysis - for engagement – is a style in which the purpose of integrated sustainability analysis is to lend weight to a programme of engagement with the company owned – but where a buy/sell decision is not envisaged
- Community investing – involves the provision of capital and financial services to communities that are underserved by traditional financial services and particularly to low-income individuals, small businesses and community services such as child care, affordable housing, and healthcare
- Fonds solidaire (solidarity funds) – is a uniquely French strategy in which managers invest 5%-10% of their portfolio into unlisted companies that are officially accredited as meeting ‘solidarity’ criteria (by employing staff on supported job schemes, by sanctioning the election of management by the workforce or by applying certain rules on the pay of executives and staff)
- Economic empowerment investment – is a uniquely S. African form of SRI that involves direct investment in the economic infrastructure that is needed to support ordered and equitable economic growth together with sustainable community development
- Microfinance funds – are funds that invest in the equity of microfinance institutions that promote local economic development at the ‘bottom of the pyramid’ through the issuance of ‘micro-loans’ and ‘micro-insurance’. (See Note 1 below)
- Income sharing funds – enable investors to donate a portion of their income to humanitarian or environmental causes
- Sustainable finance – is an investment style whereby specialist sustainability research enables capital to be allocated to companies and projects that lead directly to sustainable development – sustainability is the pre-eminent factor behind the investment decision. Investee companies or projects are typically unequivocally sustainable alternatives to mainstream businesses.
In addition to these, other terms that are used commonly – but do not classify as unique strategies - are:
- Impact investing – an umbrella term that groups a number of the styles described above (clean tech, microfinance, community investing etc.) through recognition of their role in delivering social and environmental benefits. It is often used as a contrast to styles that involve (positive or negative) screening of large cap stocks and is positions itself across a wide spectrum of financial outcome between philanthropy and mainstream investing
- ESG investing – a term that is used in some markets in place of ‘integrated analysis’ to refer to investment that uses environmental, social and governance factors to improve financial analysis –the term is typically used in contrast to contrast the strategy with screened investment
Note 1: Microfinance is also a component of Shariah investment