Definitions of Key Terms in Responsible Investing
CFA Institute has released definitions of key terms in responsible investing, aiming to strengthen communication among investors, regulators, policymakers and market participants and improve information standardization.
This definitions of key terms in responsible investing are released by the CFA Institute in partnership with the Global Sustainable Investment Alliance (GSIA) and the Principles for Responsible Investment (PRI).
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CFA Institute’s Definition of Screening
CFA Institute believes that screening refers to the process of establishing rules to determine which investments are allowed or not allowed in an investment portfolio. Screening can be used in a variety of situations, such as complying with regulatory rules, satisfying investor preferences, controlling investment risks, etc. Screening criteria can be based on various investment characteristics, such as market capitalization, credit rating, trading volume, geographical location and environmental, social and governance (ESG) characteristics, etc.
Common screening methods include Exclusionary Screening, Negative Screening, Positive Screening, Best-in-Class Screening and Norms-Based Screening.
CFA Institute’s Definition of ESG Integration
CFA Institute believes that ESG Integration refers to the continuous consideration of ESG factors in investment portfolios to improve risk-adjusted returns. ESG integration includes finding ESG information, assessing the materiality of the information, and integrating important information into investment analysis and decision-making.
ESG integration requires the identification and assessment of ESG risks and opportunities. It is an ongoing part of the investment process rather than a one-time activity. ESG integration does not assume that certain factors are important to investment decisions, all ESG factors will be considered and determined based on actual circumstances.
CFA Institute believes that ESG integration can be applied in multiple situations such as securities analysis, industry analysis, scenario analysis, and includes processes such as asset allocation, security selection, and portfolio construction.
CFA Institute’s Definition of Thematic Investing
CFA Institute believes that thematic investing refers to selecting assets to understand specific development trends. Thematic investing involves constructing a portfolio to benefit from specific long-term trends through a top-down process of selection. It usually focuses on a specific interest or a portfolio of investments in a specific area.
Thematic investing allows investors to increase their investment exposure to trends, and some investors use thematic investing to diversify their portfolios or hedge against specific economic risks. In ESG field, specific trends include climate change, circular economy, and these investments can focus on a single trend or multiple related trends.
CFA Institute’s Definition of Stewardship
CFA Institute believes that stewardship refers to using the rights and influence of investors to protect and enhance the long-term value of beneficiaries. As trustees, investment institutions need to protect the interests of clients and influence investees. These impacts include filing shareholder resolutions, engaging with investees, setting industry standards, and can often be implemented across multiple asset classes.
Customer’s value concept is diverse, including the market value of the entire investment portfolio, the long-term value creation capabilities of enterprises and economies, and other assets such as the environment, nature, and society that support the economy.
CFA Institute’s Definition of Impact Investing
CFA Institute believes that impact investing refers to investments that produce positive, measurable social and environmental impacts and financial returns. It pursues two goals: improving conditions and generating financial returns. Impact investing spans multiple asset classes, including fixed income, real assets, private equity and more.
Impact investing aims to have a positive impact, so investors need to consider whether the expected improvements can occur and how the extent to which these occur will be measured. Investors can determine their own return on investment and measure and manage the impact based on an internationally accepted indicator system.
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