Distinguishing ESG, sustainability and impact investing

The investment industry could make a significant contribution by avoiding more jargon and acronyms.

COP26 is making headlines around the world with commitments to phase out methane emissions, reach net zero, and invest in greener alternatives. But when ‘green’ collides with financial services, it’s hard to say if everyone is on the same page.

That’s not to say that companies are not on board with doing what’s right for society and the planet – and put their money where it matters – but when using words such as ‘sustainable’, ‘ESG’ and ‘responsible’, do we all mean the same thing?

I spoke to advisers and wealth managers who use the first two terms interchangeably, especially when the ‘E’ in ESG is involved.

But others believe there is quite a difference between sustainability and ESG.

Trade bodies including the CFA InstitutePimfa, and the PFS and CII have brought ESG certifications to market to help advisers get to grips with all things green, but there needs to be greater clarity about these terms and how they should be used.

On the back of this, International Adviser spoke with Square Mile and Dynamic Planner, both of which recently rolled out guides for advisers on the topic, as well as with the PFS and CFA to understand the differences between ESG, sustainability and impact investing and how those differences influence financial services firms and products.


According to Matt Connell, director of policy and public affairs at the Personal Finance Society (PFS), the differences are pretty simple:

  • Sustainable investing is based on the selection of companies or projects that “have a positive impact on society and the environment”;
  • ESG covers investments in socially- and environmentally-conscious practices, but “it can also screen out cash going into organisations with undesirable characteristics, such as the poor treatment of workers”;
  • Impact investing is a “general investment strategy that seeks to generate financial returns while also creating a positive social or environmental impact”.

Nick Bartlett, head of practice analysis at the CFA Institute, echoed Connell’s views: “ESG investing is broadly concerned with how environmental, social and governance issues can affect the long-term risk and return of assets and securities, and the integration of these considerations into the investment process.

“Sustainable investment is commonly defined as the selection of assets that contribute in some way to a sustainable economy, such as an asset that minimises natural and social resource depletion.

“Impact investing is understood to focus on investments made with the specific intent of generating positive, measurable social and environmental impact alongside a financial return.”

Bartlett added that, although these are accepted ‘definitions’; in practice, the industry tends to use these interchangeably, “occasionally causing confusion”.

That’s why he believes it’s critical for advisers and clients to “agree on terms at the outset of any engagement” when discussing ESG or sustainable investing.


Anna Mercer, responsible investment analyst at Square Mile Research, said that the firm’s own studies found that there was considerable understanding among advisers of the language used in responsible investing.

But “this is not to say that they fully appreciate the nuances of the language being used across the industry, particularly since there is often a lack of consistency in the way terms such as ESG, sustainability and responsible investment are applied”, she added.

Such terminology – sometimes bordering on jargon – can vary from firm to firm.

Mercer explained: “At Square Mile, we make a key distinction between ESG and responsible investment. For us, ESG considerations are an investment input, or a screen, like any other a fund manager may apply when considering a stock for inclusion in a portfolio, such as price-earnings ratio or free cash flow.

“Responsible investment, however, is an umbrella term for a range of approaches that actively seek to make both a positive difference to the environment and society and a financial gain. We would categorise funds which emphasise sustainability to be one of four subsets of responsible investment whose broad objectives will meet differing investor priorities and preferences.

“Sustainable solutions funds, meanwhile, will typically be invested in businesses that provide a solution to social and environmental challenges through their core products and services in the belief that this will realise long-term financial benefits.

“Finally, the manager of an impact fund will have a clear intent to make a positive social or environmental impact by investing in companies providing solutions to challenges through core products or services while providing evidence of this impact.

“Education around these differing approaches to responsible investment is of fundamental importance to enable advisers to continue to identify suitable investments for their clients, which align with their client’s values and priorities when it comes to putting their money to work to build a better future, alongside a financial return,” she added.

Letter soup

Jim Henning, head of investment services at Dynamic Planner, said that a wider discussion on labels and expectations in the industry is needed, especially as more solutions based on sustainable/ESG/impact principles come to market.

“ESG standards and reporting are widely referred to as an ‘alphabet soup’, and when we are at a-minute-to-midnight to prevent climate catastrophe, one significant contribution we could make as an industry would be to avoid adding more jargon and acronyms,” he said.

“Most recently, we have seen the emergence of positive impact solutions – these are relative newcomers and differentiated from those approaches that consider ESG risks solely as inputs to the investment decision-making, to those with a direct focus on the sustainability outcomes of their investment decisions.

“Their objective is to generate positive, measurable social and environmental impact alongside a financial return.

“Further tightening of definitions and reporting requirements are due to be announced over the coming year by the EU, and also the FCA recently announced plans to introduce a comparable set of enhanced fund disclosures, as there has been much confusion over which investments can be labelled ‘ESG’ or ‘sustainable’.”

Regulatory action

The UK watchdog has recently set out a roadmap for sustainability disclosure requirements for the wider financial services industry – to be phased in during the next couple of years.

While there wasn’t much detail on what will be expected of financial advisers, the one clear thing is that they too will be, in one way or another, part of the green push.

On 3 November 2021, the FCA also unveiled a discussion paper on the potential criteria to be used to classify investment products.

The aim is to “help consumers navigate [a product’s] sustainability characteristics”, the regulator said.

But the financial sector will need to “respond effectively”. “Consumers need high-quality information and clear standards,” the FCA added, “and they need to be able to trust firms to deliver on their promises”.

This will give investors “the confidence to put their money where it can deliver the most sustainable outcome,” said the regulator’s chief executive, Nikhil Rathi.