Resources

Common Terms

ETFs, ESG, SRI — sometimes it seems like people in the financial world are just playing with magnetic refrigerator letters. To understand these terms and more (plus how to pronounce them), check out our easy-to-read cheat sheet of commonly used terms, below.

SRI

Acronym Pronunciation: Say it like you see it, “ess ar eye”

Socially Responsible Investing or Sustainable and Responsible Investing. This is an umbrella term for investing that takes social impact into account when making investment choices, often giving preference to companies and funds with higher-than-average Environmental, Social or Governance factors (see ESG Investing for more on those terms).

ESG Investing

Acronym Pronunciation: Say it like you see it, “ee es gee”

ESG Investing seeks positive returns and long-term positive impacts on society, the environment, and the performance of the business. These investments focus on Environmental, Social, and Governance (ESG) factors broadly summarized below:

Environmental Factors - these factors assess how a company manages its greenhouse gas emissions, waste management, and energy efficiency both directly as a business and impacts from its supply chain activity and consumer use of its products. For this category, think carbon footprint or recycling and reuse practices, for instance.
Social Factors - these factors assess how a company manages relationships with employees, suppliers, customers and with the communities in which it operates. Criteria relating to diversity, equity, and inclusion is found within this category. For this category, think diversity of workforce, pay gap policies, and ethical and humane treatment of employees and suppliers as examples.
Governance Factors - these factors assess the rights and responsibilities of different stakeholder groups in the governance of a corporation. These include company leadership, the governance, complexion, and independence of the board, internal controls, audits and shareholder rights. In this category, think executive pay or diversity of the board as examples.

Impact Investing

Impact investing is a term coined in 2007 to refer to investments made across asset classes with the intention to create positive, measurable social and environmental impacts alongside a financial gain. To qualify as an impact investment, companies must have clear intentionality, measurement, and transparency around the positive impacts they seek to have. Some impact investors even require that a company's core product or service have societal or environmental benefits, such as electric vehicles, renewable energy, healthy food offerings, or a 1-for-1 model (think Tom’s “buy-a-pair, give-a-pair” model) that brings benefit and impact with each purchase.

B-Corp

A special certification provided to for-profit companies based on social and environmental performance and company governing documents. The certification is provided by the non-profit, B-Lab. Companies pay an annual fee based on annual sales and must re-certify every three years.

Positive Screening

When deciding what will make it into their investment portfolios, many investors will use what is termed “screening” to ensure they include (positive screening) and exclude (negative screening) the things that matter to them most.

Investors use “positive screenings” to prioritize investments in industries or companies that are considered "best in class" for environmental, social, or governance factors (see our definition of ESG investing for more detail) as compared to peer industries or companies. Other positive screens would prioritize investments based on sectors, ethics, geography, or other criteria important to the investor. For example, an investor might prioritize companies with more diverse boards or companies that have made a commitment to net zero carbon emissions. The key is that investors get to decide for themselves what to screen for.

Negative Screening (also known as Exclusions)

Sometimes referred to as Exclusions or Divestment, negative screens have a long history as a tool for investors to "crowd out" bad actors or to exclude companies whose products conflict with their values. Some common “negative screens” are for things such as alcoholic beverages, pornography, guns, or gambling. Today, investors might exclude fossil fuel producers or companies who ignore human rights in the production of their products. The key here is that a negative screen is used to help keep out companies that the investor wouldn’t want to hold in their portfolio.

Benchmarks

A benchmark is a standard or measure. Benchmarks can be used to measure the risk and return of a portfolio. The S&P 500 index is often used as a benchmark for stocks, while US Treasuries are used for measuring bond returns and risk. Firms that measure ESG ratings also provide benchmarks for the standard among those companies that prioritize ESG factors.

TL;DR: think averages and the market standard you want to beat.

Due Diligence

Research and analysis of a potential investment in preparation for a business transaction. Think "do your homework before you invest."

Greenwashing

Conveying a false impression or promoting misleading information to a potential investor or consumer, this includes unsubstantiated claims as it relates to goals or progress of environmental, social or governance practices or progress.

ETF

Acronym Pronunciation: Say it like you see it, “ee tee eff”

An Exchange Traded Fund (ETF) is similar to a mutual fund but usually requires a lower minimum investment amount. Both types of funds contain a mix of different stocks that help investors diversify their portfolio. ETFs are different from mutual funds in that they can be traded throughout the day, like stocks, versus mutual funds that can only be purchased at the end of a trading day. For investors interested in ESG, there are a number of ESG ETFs available today. In 2020, the vast majority of ESG ETFs outperformed the benchmarks for their category. ETFs offer tax advantages to investors and tend to realize fewer capital gains than mutual funds. The fees can vary, as well, so it is important to clarify both tax and fees before investing.

Net Zero Carbon

Net Zero refers to the zero balance in the amount of greenhouse gas produced and the amount of carbon removed from the atmosphere. This includes a reduction of greenhouse gasses produced, combined with "carbon offsets" that enable a company to offset its carbon footprint. Think planting trees, investing in renewable energy, and other investments that offset the carbon footprint of a company.

Asset Classes

It might be easier to think of Asset Classes as “asset categories” for investment, with the different categories having distinct characteristics relating to risks and financial returns, as well as to specific laws and regulations. A diversified investment portfolio would have investments in each category. Deciding how much to deploy or invest in each class/category can vary greatly based on age or risk-tolerance, among other factors. Understanding the characteristics of each is key to making informed investment decisions. Highlighted below is a summary of Asset Classes:

Cash and cash equivalents - This asset class represents all types of bank accounts and represents low-risk, and generally low financial returns, for the investors.
Fixed interest or fixed income - Fixed interest assets represent investments that offer a set financial return over a specific period, usually 1-3 years. These types of investments can include corporate or government bonds and mortgages. This asset class is not highly volatile but has a higher risk profile and higher financial returns than cash.
Equities - Equities include domestic or international investments in companies or funds that invest in companies. Public equities invest in public companies, while private equity invests in companies that are privately held – which means their shares are not traded publicly. This type of investing enables the investor to become a part-owner, or shareholder of a company. Equities represent the highest risk volatility (potential to change in value) of all asset classes and can achieve much higher investment returns

This list will continue growing to help you better understand the terms and acronyms used in FWIW and the socially conscious investing spaces. If you’re looking for more terms, here are a few more resources we love: