In a fast-developing field, action is more important than terminology.  Nonetheless, clarity of description is important to ensure that thought defines language rather than the other way round.  So here are a few thoughts on terms that are common in the SRI industry.

Sustainable Development

‘Sustainable development’ (or ‘sustainability’ for short) was elegantly defined in 1972 by the Bruntland Commission as “development that meets the needs of the current generation without compromising the ability of future generations to meet their own needs”.

Although not all SRI funds subscribe to the concept of ‘sustainable development’ (most do) and the concept certainly lacks the practical detail; it is, nonetheless, a useful touchstone for all SRI investors and for those engaging with this industry.

ESG (environmental, social and governance)

The term ‘ESG’ is ugly and misleading but, unfortunately, becoming more widely used.  It is misleading because it conflates two structurally different dimensions of corporate activity and ignores one.  It conflates sustainability issues and corporate governance issues and it ignores the economic dimension of sustainability.

Investors will typically be interested in how companies manage all of the factors that contribute to the profitability of the company: production, marketing, product development, employees, regulatory relationships etc.  In addition to this, SRI investors will have particular interests in those factors with social, environmental or economic dimensions.

On top of these issues and management processes, investors will expect companies to have a structured system of corporate governance to balance the interests of management and shareholders and to ensure that the latter are properly informed and their interests appropriately represented in major decision-making.

Although all three are needed, the ‘corporate governance’ system is structurally different from the management system that it overlays and the issues managed by that system.

The dimension that’s missed is the economic one.  Sustainability investors are generally concerned with the relationship between economic, social and environmental factors and the financial performance of companies.  Although it corrupts the phrase, this is a ‘quadruple bottom-line’.

It is instructive to note that the term ‘ESG’ did not arise from any research framework or theoretical assessment but out of the practical need of investment managers to resource two areas of research and engagement that extended beyond their conventional boundaries and to communicate their activity to clients.  A virtue was made of this necessity by a number of houses and it has been used to extend the influence of both ‘corporate governance’ and ‘sustainability research’.

The term has done no harm and may have hastened the uptake of sustainability in a number of areas.  However, caveat, it is jargon; it is inaccurate; it is not a good basis for rigorous and comprehensive research.

Corporate Social Responsibility / Corporate Responsibility

Bearable! Just!  But desperately limited in its ambition – ‘CSR’ or ‘CR’ says “we need to be as responsible as society currently expects us to be”.  By contrast, “Sustainability” says “we need to align ourselves with the major social, environmental and economic changes that face society at large – and prepare ourselves for the world that will be”.

Ethical investment

Although SRI was originally known as ‘ethical investment’, it now deals with so few issues that can be accurately described as ‘ethical’ (as opposed to ‘social’ or ‘environmental’) that the term no longer has much currency outside its (often strong) marketing benefits in some retail markets.


Now this one would make an interesting case study for a student of linguistics – a word invented by one group (the Enhanced Analytics Initiative) for one specific time and purpose – but with probably no long-lasting meaning.

The term ‘extra-financial’ was specially coined to motivate a given audience (sell-side brokers) to think outside their usual parameters (the financial) without prejudging the issues that they would decide to focus on.

The reports of the Enhanced Analytics Initiative catalogue the success of this and the limitations – and need no additional commentary from me.

Will the term last? Probably not – but it was probably never intended to – it served its purpose.  After all, the term is defined by what it is not!