Research investing jargon

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Description

Whether you are a seasoned investor or have a retirement account you do not know much about, one of the best steps you can take before directly tackling sustainable investing is getting to grips with the jargon.

Become a wiser investor to help ensure you back the right companies and make better investments for yourself. Understanding the language of investing better, and sustainable investing in particular, helps you make better decisions for your money and ensures it is not supporting polluting companies.

Tips

• Unsure what a particular investing term means? Check out Investopedia online for easy to read terminology guides. Pop any term into a search engine, followed by Investopedia, and there is usually an article explaining it (e.g. ‘what is a growth fund Investopedia’). It is completely free!

There are several forms of sustainable investing which can be confusing, as the names are sometimes used interchangeably, even though they mean different things:

• Environmental, Social, and Governance (ESG) criteria are an increasingly popular way for investors to evaluate companies in which they might want to invest. For example, environmental factors are incorporated into a financial analysis to help predict financial performance of an investment. Positive scores on factors like pollution, human rights, and transparency can create growth, while negative scores may inhibit it. While this does create investment in companies which tend to perform well on sustainability, the main focus of ESGs is on financial performance.

• Socially Responsible Investing (SRI) (also sometimes referred to as ‘ethical investing’) is about screening on a wider, ethical front, whereas ESG factors are not used to actively screen out particular kinds of companies according to ethical guidelines. SRI investors may, for example, avoid stocks in industries such as weapons, tobacco, and gambling, and/or they might allocate a particular portion of their investment to charities.

• Impact Investing: You could say that this is the gold standard of sustainable investing, as the focus is on positive impacts created by the investment. Impact investment funds focus on businesses that bring a benefit to society or to the environment. Impact funds might hold stocks, for example, in companies which are leaders in gender equality or those developing renewable energy. Your money therefore helps to deliver these objectives and their benefits to the world. This kind of investing allows you to put your money towards issues that are important to you.

• If you are looking to invest in stocks, articles discussing and ranking ‘sustainable/ethical funds’ will often include ESG, SRI and Impact Funds together.

• You can research funds you are interested in individually on websites like Morningstar to find out what kind of sustainable fund it is and what their main stocks are. Some funds that achieve high sustainability rankings also hold stocks in companies with poor records on particular issues, so it is smart to double-check your money is being invested the way you want it to be. ESG funds are likely to be the most vulnerable to this as they are the least focused on delivering social and environmental objectives.

• If you are not sure about other investing terms, go ahead and look them up to learn more also.

• In particular, anyone that invests in mutual funds or exchange traded funds (ETFs) should know about Expense Ratios. This is the cost of having a particular fund. There are many bad options with high expense ratios that drain the gains of unsuspecting investors.

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