The alphabet soup of social investing

If you decide to align your portfolio with your ideals, be prepared for a rapid slide into a swamp of murky jargon. Are you talking SRI? Or impact investing? If corporations tout their ESG, is that a good thing?

Sorting out this alphabet soup can be daunting, because the terms are related. Also, Wall Street is always ready to jump on any hot new trend and the ideals can get muddied in the hype. Here’s a primer to help you navigate the shoals of social investing:

Socially responsible investing (SRI) is the practice of screening out bad companies so that your money gets invested in firms that support your ideals. What constitutes a bad company is up to you. Typically, SRI mutual funds screen out tobacco and alcohol companies and big polluters. Some investors screen out defense contractors. More recently, investors concerned with global warming have moved money out of oil and gas companies and into clean-energy industries, like solar and wind. More recently, some SRI organizations have changed the acronym to Sustainable, Responsible, Impact Investing (see below).

Environmental, social, and governance (ESG) factors are the investment world’s way of analyzing the bottom-line impact of a company’s broader practices. Policies once thought of as extra costs such as environmental stewardship, waste reduction, and humane treatment of employees have begun to be recognized as ways that companies can improve their bottom line. Also, some US corporations have begun to take seriously activists’ warnings that combining the CEO and board chairman positions doesn’t offer the necessary oversight, putting the corporation and investors at risk. Sniffing extra profits, Wall Street is suddenly attuned to social investing. 

Impact investing – the newest term – goes a step beyond SRI by focusing on companies that can measure their direct social impact and still return a financial profit. The social impact may be jobs created, farmers supported, carbon emissions cut, or waste reduced. The Global Impact Investing Network defines it this way: “Investments made into companies, organizations, and funds with the intention to generate social and environmental impact alongside a financial return.” But the exact definition is still in flux. Some impact investments have a zero percent return.

“My two most important criteria are: 1) at least 75 percent of revenue generated from products or services that positively impact social/environmental problems; and 2) publicly reports on impact performance,” Bruce Campbell, chief happiness officer for law firm Blue Dot Advocates, writes in an e-mail.

These practices are not mutually exclusive. SRI investors may devote some of their money to impact investing and companies with strong ESG programs. And impact investors who want a balanced portfolio usually have to resort to some SRI stocks because most impact investments open to ordinary investors tend to act more like bond investments than stocks.   

“From my vantage point, there is an umbrella term that connects everything – and that is responsible investing,” says Jenn Pryce, chief executive of the Calvert Foundation.

Triple bottom line – an accounting system that encompasses not only a company's financial but also its social and environmental performance. Coined in 1994, TBL – sometimes known as people, profit, and planet – has become incorporated in the fabric of sustainability reporting from the United Nations, other international bodies, and increasingly global corporations. Some activists are championing a quadruple bottom line, which would include either "purpose" or "progress" as a fourth criterion.