New responsible investment definitions aim for clarity and an end to confusion

The hope is that the new definitions will become the global standard.

Friday, November 3rd 2023, 6:00AM

by Andrea Malcolm

Today, out of New York, the CFA Institute, Global Sustainable Investment Alliance (GSIA) and Principles for Responsible Investment (PRI) have put out a paper defining sustainable finance terms.

Locally, the new guide is backed by the Responsible Investment Association of Australasia, which as a member of GSIA, contributed to its development.

The resource, which has been issued globally, aims to set a new industry standard and benchmark for terminology in the responsible investment (RI) sector. It includes definitions across screening, ESG integration, thematic investing, stewardship and impact investing.

The intention is for the definitions to form a worldwide standard.

RIAA CEO Simon O’Connor says RIAA worked with its GSIA peers, the CFA Institute and the PRI to eliminate divergence across different countries in developing the guide.

Fighting greenwashing

“What it ultimately provides is more precision in the way funds are marketed and sold in the marketplace. At the moment we often see language used very loosely and imprecisely. Funds will say they're doing ESG integration but there’s not a lot of evidence as to what that means in practice.

“So this raises the bar in terms of fund managers and KiwiSaver providers to substantiate and put clarity around the way they use language and claims around responsible investment approaches.”

As RI has grown, so too has a plethora of terminology, buzzwords and jargon, all meaning different things to different people. Such imprecision has been fertile ground for misunderstanding.

O’Connor says the absence of a globally agreed set of definitions has created a lot of confusion around the world and underpinned greenwashing concerns.

The jointly published paper, "Definitions for Responsible Investment Approaches”, contains terms and definitions, detailed explanations, and guidance for using the terms in practice. A key benefit is that it harmonises and clarifies existing terms and definitions, without introducing new jargon.

For each term, the paper gives a definition, detailed explanation, a list of definitions that serve as the primary inputs, and guidance on how to use the terms.

The guidance on ESG recommends that when communicating to general rather than professional audiences, investors should avoid the term “ESG integration” and instead use plain language to accurately describe how ESG factors are considered in the investment process.

The making of a standard

There are formal legislated standards, standards that are endorsed by international bodies such as the ISSB (International Sustainability Standards Board) and IOSCO (International Organization of Securities Commissions) and de facto standards which are embedded through widespread practice. At this stage, the new RI definitions are aiming to be the latter and are also seeking endorsement from IOSCO.

The paper came about in response to a call from ISOCO two years ago for the industry to develop common sustainable finance terms and definitions, including around RI approaches, to give consistency throughout the global asset management industry.

The three organisations with the broadest possible coverage of RI bodies and individuals in the world, managing hundreds of trillions of dollars of assets, came together to agree on definitions and create a de facto standard.

To become an industry standard, they now need to be embedded into practice. For the RIAA this will mean adopting the definitions in its responsible investment benchmark report and certification programmes and working closely with regulators.

O’Connor says, “We’ve been on the front foot to brief the FMA because in their pursuit of trying to avoid misleading and deceptive conduct around greenwashing activities, it’s important to have a global benchmark to refer to.

“They set new expectations and the way we see it working in practice is that companies will start to be held to account against these standards. And our hope is that we start to see regulators using these standard definitions when they are taking enforcement actions or providing guidance to the market. So we see that they should play a really useful role in terms of shaping and shifting behaviours in a marketplace.”

Another brick in the wall

O’Conner says the new definitions are a building block that can be used for and with other sustainable finance initiatives such as labelling and disclosure standards. They complement the ISSB (International Sustainability Standards Board) disclosure standards and sustainability taxonomies which define what can and can’t be considered sustainable activities and financial products.

“All these pieces are the building blocks of a really strong sustainable financial system. We need them all to connect and support each other. They are all mutually supportive pieces for building a professional, sustainable financial system, one that's going to have the best chance of unlocking sufficient capital to drive a net zero transition.”

Tags: RIAA