The rise of responsible, ethical and sustainable investing have come with a fair amount of confusion. We put all different terminology and investment approaches by some leading fund managers under the microscope. 

This information does not take into account your personal objectives, financial situation or needs. You should consider if the relevant investment is appropriate having regard to your own objectives, financial situation and needs.


As we all know, there are various ways one can ‘do good’. You could be reducing your plastic waste or donating to charities advancing the education of women and girls. Perhaps you are passionate about ending child labour exploitation, and therefore donate, volunteer and/or invest accordingly. Maybe your do-good priority is supporting scientific research aimed at curing illnesses.

All are wonderful causes – no one any more important than the other. Taking ‘responsibility’ is inherently personal and is ultimately about doing whatever helps you sleep at night.

When it comes to investing, marketers follow a similar recipe when imploring us to do good with our money. Add a little “ethical”, sprinkle in some ‘sustainable”, season with a pinch of “responsible”, maybe garnish with a little “fossil fuel free” and voila!

These now familiar terms are often used interchangeably, further perpetuating the confusion. We’re about to put them all under the microscope to work out what they really mean.

I’ve been asked: what is the difference between ethical and sustainable? It made me pause. In a way, I had always thought ethical was sustainable and sustainable was ethical, not unlike violet and indigo. They are both shades of purple, so what’s the big deal?

In the investing world, the definition of responsible investment varies, which is then reflected in a fund manager’s investment philosophy and methodology.

Funds may emphasise specific underlying issues. For example, paying particular attention to environmental measures like Co2 emissions. Or focus on human rights violations, which are often indicative of underlying social issues.

Sustainable themed funds can also focus more on E (environmental) than S (social) or G (governance) factors. However, funds like Elevate Super and the AtlasTrend managed funds, which uses the UN Sustainable Development Goals (SDGs) as a framework, takes a more holistic approach.

Fund managers are still evolving their approaches to the responsible investment challenge, many experimenting with the best way to do things. A rise in the provision of third party sustainability data providers is helpful, as are regulatory changes.

The world is continually working to define responsibility in a way that makes sense for companies and countries to report on. The EU Taxonomy is one example of regulation aiming to increase investment in sustainable activities. It is currently more focused on environmental sustainability but it is likely the system will expand to cover social aspects over time.

We welcome a more standard approach to classification of terms to help clear up the confusion.

So, we recently had a chat to some other sustainable fund managers and got their opinions on the responsible investment spectrum.

1. “It can, at times, seem like there are a number of entirely interchangeable terms in the responsible investment world. This is before you even get into the reality that many people in the investment industry still use the term Environmental, Social and Governance (ESG) as a ‘catch all’ banner for everything. None of this is very helpful to the confused end investor trying to decide between the benefits and drawbacks of different approaches.” – Andrew Cave, Global Stewardship team member and Head of ESG at Baillie Gifford.

Andrew mentions a lot of helpful innovation has taken place in the last few years as asset managers have experimented with different ways of approaching the responsible investment challenge. The Baillie Gifford Global Stewardship approach has certainly evolved significantly.

“Regarding the terminology, ethical investment is the oldest of the descriptors. It tended to be characterised by an exclusionary approach, which accepted there would be a significant downside impact to ‘doing the right thing’. Such as by divesting from the tobacco or arms sectors during periods when those industries were making large profits.”

“Responsible investment is a broader and more recent term, which also tended to look at the operations and impacts of all companies in the portfolio, not just the more controversial sectors.”

“Sustainable investing is the most recent of the three terms. It has rapidly gained traction because it more clearly encompasses environmental challenges such as climate, as well as more traditional ‘socially responsible’ issues. Sustainable investing as a term also has the added attraction of suggesting that all other types of investing are financially unsustainable in the long run.”

“To use Global Stewardship as an example, if you accept the definitions above then the Fund is both ethical – as it formally excludes sin sector stocks – and sustainable, through the integration of ESG into its stock picking. In our view, the latter is far more important, as we believe investing in companies that add value to society, balance the needs of their different stakeholders, and exhibit a responsible culture will be fantastic investments for our clients over the long run.

What is most important in all of this, is for investment managers to clearly explain their own responsible investment definitions, processes and funds. A lot of thought and effort needs to go into the details of any robust approach. In the absence of clear standards and widely agreed definitions, this transparency is key, with evidence to back up the approach taken. That way, all investors can be clearer about what they are actually buying into and can then check that their managers are ‘walking the walk’. So, for example, CFS publish full holdings for the Global Stewardship Fund, and we report on engagement and voting efforts via annual ESG report.”

“Although some of these have value when understood in the proper context, the risk is they are being held out as a ‘silver bullet’ in terms of judging which funds are responsible, and which are not”.

Andrew also pointed out these metrics are often backward-looking, risk-focused, lack nuance and so can never replace a detailed understanding of individual companies.


2. “Product names are often misleading and current approaches to investment ratings fall short in distinguishing between the various features sought by investors”.Nanuk’s CIO, Tom King

Tom believes there are two common misconceptions in ESG and responsible investing:

Myth 1: ESG and responsible investment is the same thing 

The term ESG is widely used in many different contexts and it means different things to different people. In reality, ESG is simply an acronym that specifically refers to environmental, social and governance factors in a company or an investment portfolio.

Until quite recently, ‘ESG investment’ typically referred to an investment strategy prioritising companies with better governance, environmental and social practices – a logical approach which has been shown can reduce risk.

Nowadays, the term is often used to as a catch-all term to describe a broad set of investment approaches that involve consideration of E, S and G factors or deliver specific ESG-related outcomes, better described as responsible investment.

Responsible investment refers to a range of different approaches that deliver non-investment outcomes of a responsible nature.

Myth 2: ESG and responsible investments are clearly defined

Responsible investment strategies (or, as many still say, ESG strategies) incorporate a range of approaches and techniques intended to deliver specific outcomes.

  • Traditional ESG strategies often seek to reduce risk through focusing on companies with better E, S and G practices. Other more specific ESG strategies may focus on different outcomes – indeed, focusing on companies that are improving their E, S and G practices may provide better returns.
  • Ethical strategies focus specifically on reducing or avoiding investment in areas of ethical concern, such as gambling or tobacco, but may vary considerably in the scope of their exclusions.
  • ‘Low carbon’ strategies seek to deliver lower carbon emissions or carbon intensity, typically through investment focused on companies with inherently lower emissions, but not necessarily in companies that are directly contributing to global decarbonisation.
  • This is more the remit of ‘sustainability-themed’ strategies, which as the name suggests are focused on investing in companies that are in some way ‘sustainable’ or aligned with sustainability objectives such as the UN’s 17 Sustainable Development Goals.
  • ‘Impact strategies’ should provide intentional and measurable environmental or social outcomes, which has historically only been possible through direct or private investments, although the terminology is now being widely used by more mainstream listed sustainably themed funds.
  • Finally, ‘engagement strategies’ seek to achieve better E, S or G outcomes through stewardship activities such as engagement with boards and management teams and targeted voting.

It is important to note these approaches are not mutually exclusive, and many ESG or responsible investment products align with two or more of the related attributes.

A sustainability-themed strategy can also be an ethical, but it may not be low carbon or high ESG scoring.  A strategy in which ESG outcomes are delivered via engagement, may be most effective if invested in companies with poor sustainability or governance.

Additionally, the way in which they are implemented will also result in significant different portfolios.  Approaches such as negative screening, positive screening, best in class or quantitative scoring will all produce different results.

Tom points out that each of the approaches outlined above should lead to different investments and different outcomes for investors.

A company like Mastercard may have good ESG practices and a high ESG score, and below carbon, but will not necessarily provide strong sustainability related outcomes.

A company like Phillip Morris (tobacco) may also have strong ESG practices and a high ESG score, but is unlikely to be considered ethical by many. Vice versa, companies like Tesla or Waste Management may provide strong contributions towards environmental outcomes but won’t necessarily have low carbon emissions relative to banks or technology companies, and may not score well on traditional ESG metrics.


3. Alphinity point to the RIAA framework (below), which they believe is helpful in defining the type of ESG strategy.

While acknowledging ESG factors are an essential part of their process, they believe their investment approach goes beyond this by using a sustainability framework – the UN Sustainable Development Goals (SDG) – to define its investable universe.

To be included in Alphinity’s investible universe, companies need to align with at least one SDG, have an overall net positive impact and strong ESG management practices in place.



RIAA's responsible investment spectrum



Alphinity agree that recent times have seen a proliferation of ESG-focused products, a by-product of the growing demand in the space. For this reason, Alphinity believe it is vitally important to have a transparent process and framework to define a product.

As part of this transparency, Alphinity Sustainable publicly shares proxy voting records, as well as a record of the holdings in the portfolio.

Alphinity also point to active management as a key tenet in responsible investment. They are part of the CA100+ investor initiative, and engage extensively with Qantas and other big emitters in their portfolios to firstly set clear targets, actions plans, and ultimately lead their industries towards net zero.

In addition to this, Alphinity have extensive controversy and issue management protocols.

One thing which become apparent in interviewing the different managers – when it comes to ethical or responsible investment, active management can be a powerful tool.

We hope this gives you greater clarity on the terminology and investment approaches within responsible investing.


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