CFA Releases New Definitions for Sustainable Investing

CFA Releases New Definitions for Sustainable Investing


In an effort to standardize terminology and allow institutional traders, regulators and business individuals to speak with precision about environmental, social and governance investing and different accountable investing terminology, the CFA Institute not too long ago printed new definitions for sustainable finance-related phrases.

Margaret Franklin, CEO and president of the CFA Institute, stated that this undertaking is “vital to make sure that professionals can talk effectively and successfully with one another, in addition to traders and business professionals throughout the market.”

The definitions report was printed as authorized challenges proceed to the Division of Labor’s rule allowing the consideration of ESG elements when choosing investments for outlined contribution retirement plans, together with different conflicts on the state and federal over the function ESG within the proxy voting course of and different methods.

The CFA Institute collaborated with the International Sustainable Funding Alliance and the Rules for Accountable Funding to harmonize definitions for the next accountable funding phrases:

  • Screening
  • ESG integration
  • Thematic investing
  • Stewardship

Chris Fedler, head of business codes and requirements on the CFA, stated in an emailed response to questions that well-defined terminology is important for clear communication.

“Unclear and inconsistent terminology may cause confusion within the market, making it tougher for each purchasers and funding managers to realize their objectives,” Fedler stated.

For this undertaking, Fedler stated the CFA chosen generally used phrases that wanted further readability and consistency.

“We centered our efforts solely on phrases related to accountable funding approaches, however these aren’t the one form of phrases that trigger confusion,” Fedler stated. “Greenwashing, for instance, is a ceaselessly used time period that doesn’t have a exact and constant definition.”


Screening is the method for figuring out which investments are or aren’t permitted in a portfolio. In keeping with the CFA, this course of is used for attaining an funding focus, complying with legal guidelines and rules, satisfying investor preferences and limiting danger.

The brand new definition for screening is “making use of guidelines based mostly on outlined standards that decide whether or not an funding is permissible.” The outlined standards might be qualitative or quantitative.

For instance, standards might be whether or not the issuer or safety in query is a constituent of a selected ESG-related index or whether or not a sovereign issuer achieves a given human rights efficiency rating from a selected rankings supplier.

The CFA argued that if guidelines aren’t based mostly on outlined standards and utilized constantly, the exercise shouldn’t be characterised as screening.

ESG Integration

ESG integration ought to be outlined as the continued consideration of ESG elements inside an funding evaluation and decision-making course of with the intention to enhance risk-adjusted returns, in line with the CFA.

This integration includes figuring out and assessing the ESG dangers and alternatives which can be related to investments, weighing that info and making choices about these investments. The CFA argued that that is an ongoing a part of the funding course of—not a one-time exercise.

Consideration of ESG elements, nevertheless, doesn’t indicate that there are restrictions on the funding universe and that ESG elements are given kind of consideration than different kinds of elements.

“When speaking to basic reasonably than skilled audiences, traders ought to keep away from the time period ‘ESG integration’ and as a substitute use plain language to precisely describe how ESG elements are thought-about within the funding course of,” the CFA really helpful in its report.

Thematic Investing

Thematic investing, in line with the CFA, includes choosing belongings to entry specified tendencies.

“Thematic investing is underpinned by the idea that financial, technological, demographic, cultural, political, environmental, social, and regulatory dynamics are key drivers of funding danger and return,” the report acknowledged.

This time period basically refers to choosing firms chosen in a top-down course of for inclusion in an funding portfolio that fall beneath a sustainability-related theme, akin to clear know-how, sustainable agriculture, well being care or local weather change mitigation.

The CFA famous that thematic investing differs from setting up a portfolio with a selected focus. For instance, traders might want to spend money on a portfolio of a veteran-owned enterprise as a result of they wish to assist veterans whereas incomes a monetary return, however this might not be thought-about “thematic investing” except a case was made for the way veteran-owned enterprise allow entry to a specified pattern or tendencies.

“Thematic investing usually—however not at all times—ends in a centered portfolio, however not all centered portfolios are the results of thematic investing,” in line with the report.


Within the context of ESG, stewardship refers to “deliberate deployment of rights and affect (past capital allocation) to guard and advance the pursuits of these purchasers and beneficiaries.” This consists of the widespread financial, social and environmental belongings on which their pursuits rely.

Some examples of the way through which traders can train their rights and affect embrace serving on or nominating administrators to an organization’s board, submitting shareholder resolutions or statements and voting on proposals at shareholder conferences.

The CFA argued that the time period stewardship shouldn’t be used to seek advice from actions like proxy voting and engagement except these actions are “undertaken to guard and improve total worth for purchasers and beneficiaries.”

Impression Investing

Lastly, the CFA outlined affect investing as investing with the intention to generate optimistic, measurable social and/or environmental affect alongside a monetary return.

Impression investing might be pursued throughout a variety of asset lessons, together with mounted earnings, actual belongings, personal fairness and listed fairness investments, in line with the CFA.

This idea differs from philanthropy in that it pursues a monetary return along with a optimistic, measurable affect. Impression traders have discretion over the speed of return they aim.

Wilshire Advisors LLC additionally not too long ago launched a report arguing that whereas ESG stands for environmental, social and governance, “its which means differs from particular person to particular person and from group to group.”

The Wilshire report argued that ESG investing is simply too usually seen monolithically deemed both “good” or “dangerous.”

“In the end, contemplating all ESG ‘good’ or all ESG ‘dangerous’ just isn’t prudent,” the Wilshire report acknowledged. “This binary view fails to acknowledge the nuances of ESG investing. Like several funding, the product, folks and course of matter. Moreover, this view of ESG limits the power to see that folk on both aspect of the talk have much more widespread floor than the headlines and rhetoric would recommend.”


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