Glossary of Terms

While impact investing has begun to converge with the mainstream investment industry, one of the hurdles of widespread impact investing adoption is the semantics of the quickly growing space. We have constructed this glossary to both clarify what we mean when we use specific words and empower newcomers with the confidence to jump into impact investing with both feet.

The Economy

The totality of goods and services produced and consumed by a population.

As we see it, the development of the economy can be divided into three basic subgroups – the Legacy Economy, Incumbent Economy, and Next Economy. They describe changes in the economy in relation to time, technological progress, and the risks we face:

Legacy Economy

Our historically fossil fuel-reliant economy, which began with the industrial revolution in the 18th century.

On its own, the term “legacy” is defined as “an amount of money or property left to someone in a will.” Now that we recognize the inevitable risks of fossil fuel extraction and consumption, it is clear that the money invested in these dangerous fuels must be turned over to a new economy of innovative companies that stimulate economic growth by creating solutions to our biggest systemic risks, rather than exacerbating them.

Example of a Legacy Economy product: A leaded-gas-fueled vehicle that gets ten miles to the gallon
This Legacy car is not only wildly inefficient, but also harmful to human health and safety. In the short-term, these vehicles emit pollutants—particulate matter, hydrocarbons, nitrogen oxides, to name a few—which harm respiratory, cardiovascular, and overall health. In the long term, the accumulation of greenhouse gases contributes to climate change, a major systemic risk.

Incumbent Economy
The present transitional economy which straddles the Legacy Economy & the Next Economy.

In the Incumbent Economy, Legacy Economy stakeholders try to maintain their market-share, even though their company contributes to systemic risks, while Next Economy innovators create solutions to systemic risks and market inefficiencies.

Example of an Incumbent Economy product: A gas/electric hybrid vehicle that gets 42 miles to the gallon
This vehicle highlights the risks of Legacy Economy technologies and the solutions provided by Next Economy innovators. While leaded gasoline may no longer power our vehicles and fuel efficiency has improved, use of gasoline nonetheless presents a risk to human health and safety. This is the Legacy Economy at play. Meanwhile, other companies recognize both the risk of gas-burning vehicles and the increasing demand for zero emission vehicles by consumers. These companies mitigate systemic risks by developing electric cars. This is the transition to the Next Economy.

Next Economy™

An economy in which solutions to our biggest systemic risks – climate change, resource scarcity, widening inequality – drive economic growth and allow the global economy to thrive indefinitely.

Next Economy companies are those that create products and services aiming to solve our biggest systemic risks, target market inefficiencies, and show potential for growth. The Next Economy is central to Green Alpha’s investment thesis, a solutions-oriented investment approach.

For more information, see our white paper: “Investing in the Next Economy: A New Definition of Portfolio Risk.”

Example of a Next Economy product: A zero-emissions, autonomous, internet-connected vehicle that travels long distances on a single charge, or even charges itself while in motion
By reducing vehicular emissions to zero, we will reduce our contribution to greenhouse gases and perhaps curb the trajectory of climate change. As driverless technology improves, this function will create more free time, improve safety by reducing human error, and expand access to mobility. A connected vehicle can exchange data with other cars for safety purposes, along with connected roadside infrastructure like traffic lights to ease congestion and increase enjoyment of the ride itself.

Environmental, Social and Governance (ESG) Factors

Criteria used to evaluate the strength of an investment opportunity’s environmental, social and corporate governance quality. ESG terminology was developed and promulgated by the United Nations Principles for Responsible Investing (UNPRI).

It’s important to note that ESG factors are general categories that do not have strict, industry-wide guidelines; it is up to each portfolio manager to construct and follow their own ESG rules. For this reason, it’s important to talk to your advisor and/or portfolio manager to understand their approach. We urge consumers and advisors to look at individual holdings and ask detailed questions to understand a given portfolio manager’s take on ESG factors, rather than rely on a manager’s marketing materials.

Fossil Fuel Free

There is no industry standard definition of fossil fuel free. We define a fossil fuel (oil, gas, coal) free strategy as being void of:

  • fossil fuel extractors,
  • fossil fuel industry service providers (e.g., processing, engineering, constructing, processing, refining),
  • fossil fuel transporters (e.g., pipelines, rail-lines, shipping),
  • fossil fuel-powered utilities,
  • financial institutions that directly finance any of the above,
  • significant demand-drivers of fossil fuels (e.g., fossil fuel-powered vehicles, airlines, trains).
To learn more about fossil fuel free investing, see our white paper: “Electrifying Portfolios.”

Fiduciary Duty

Regardless of whether a financial services professional is a fiduciary to an individual client, pension plan, 401(k) plan, foundation or endowment, fiduciary conduct involves two fundamental duties:

  • Loyalty: the obligation to serve the best interests of clients and avoid conflicts of interest, and
  • Care: the obligation to act with the skill, diligence, and good judgment that is reasonably expected of others serving in a similar capacity – the proof is in the process applied, rather than the outcome.
To be loyal to your clients and serve their best interests means that, as a fiduciary, one must consider a reasonably robust range of economic risks and investment opportunities. A “reasonable” range of considerations would include those that are material to sound decision-making, are relevant today and are expected to be relevant during an investment portfolio’s time horizon.

Impact Investing

Tower of Babel

Investing in projects, companies, funds or organizations with the intention to generate environmental and/or other social impact alongside financial return (GIIN). As we see in the Tower of Babel at right (source: Monitor Institute, Investing for Social & Environmental Impact), there are a variety of terms now used to describe this type of investing. We prefer to use the term “Impact Investing” because the term is straightforward and captures our investment perspective. All investments have impact, but we’re making sure the outcome of our investments are intentionally positive impacts on the economy and its ecological underpinnings.

In the past, the term ‘impact investing’ solely referred to private equity and debt placements executed by philanthropic organizations. Today the term is used more widely to mean any investment that has an intentional positive impact on society, in addition to financial returns. Consumers have likely seen some advisors and asset managers use language like, “We been investing for positive impact for X years.”  Or “all investing has impact, regardless of whether you pay attention to it or not.  We invest for intentionally positive impact for our clients.”

Regardless of what term you use, it’s important to talk to your advisor and/or portfolio manager to determine how they define and execute their impact investments, as everyone has their own criteria. We urge consumers and advisors to look at individual holdings and ask detailed questions to understand your portfolio manager’s take on impact investing, rather than rely on a manager’s marketing materials.

Negative Screening

Excluding specific companies or industries that are deemed harmful or otherwise objectionable by an investor and/or investment manager.

Proxy Voting

The process by which shareholders exercise their right to vote shares in companies held within their investment portfolios without attending company annual meetings (voting by proxy, or mail-in ballot). This can involve shareholders with voting rights delegating their votes to others who vote on their behalf.  For example, Green Alpha votes proxies for most of our clients.  We have extensive Proxy Voting Guidelines to ensure that we’re voting proxies for our clients to foster better long-term management of the companies in which we invest.

Risk, Core Systemic

Climate change, resource scarcity, and widening inequality, all of which threaten the global economy as we know it and are promulgated by Legacy Economy companies.

These risks are “systemic” in that they are global – no person, business, community or country will be untouched. They are “core” risks because they (1) are pervasive, and (2) will trigger and exacerbate a host of other threats. They are all intertwined and, if left unaddressed, will continue to have increasingly profound environmental, social, and economic implications. These risks drive Green Alpha’s Next Economy investment process. Below are some examples of these risks.

Climate change example:
“Some of climate change’s most serious risks to food security arise from more frequent and extreme weather events such as droughts, heat waves and floods. These can trigger local food crises, disrupt trade infrastructure and have cascading systemic consequences – for example, crop failure in a major breadbasket region can precipitate international food price spikes… In 2008, international cereal markets reached a crisis point when 40 governments imposed export restrictions on their agriculture sectors in a vicious circle of collapsing confidence and escalating prices,” (The Global Risks Report, 2016).

Resource scarcity example:
“Water withdrawals have increased threefold over the last 50 years, and demand is anticipated to rise by a further 50% by 2030. With a shift in global production towards intensive systems that rely on groundwater resources for irrigation, along with the current growth in demand for water-intensive animal products, agriculture becomes even thirstier. At the same time, urbanization and industrialization in emerging and developing economies are also driving up demand for fresh water in energy production, mineral extraction, and domestic use, further stretching the already tight supply,” (The Global Risks Report, 2016).

Widening inequality example:
“Excessive inequality lowers aggregate demand and threatens social stability, and can increase risks such as involuntary migration or terrorism caused by violent extremism. Rising inequality is also correlated to upticks in security problems, such as violent deaths or robbery,” (The Global Risks Report, 2016). For our perspective on widening inequality, see our white paper: “Inequality as a Systemic Risk.”

Shareowner Engagement & Shareholder Advocacy

Using shareholder power to directly influence corporate behavior and/or decision-making. This includes communicating with company management on environmental, social, and governance issues, filing shareholder proposals and proxy voting.

SRI – Socially Responsible Investing / Sustainable, Responsible, Impact Investing

“Socially responsible investing” and “sustainable, responsible, impact investing” are similar concepts with identical abbreviations (SRI). These categories also overlap with “Impact Investing.”

Socially Responsible Investing 
An investment strategy that historically focused on negative screening.

In the 1970s, the term “socially responsible investing” or “SRI” was used to refer to the process of integrating societal concerns, personal values and/or an institutional mission into investment decision-making. This process was largely defined by “negative screening,” which excludes sectors or companies deemed unacceptable by the investor. Since then, the industry has evolved to include strategies beyond negative screening. Consequently, industry terminology has gravitated away from “socially responsible investing” to “sustainable, responsible, impact investing.”

Sustainable, Responsible, Impact Investing
The current iteration of “socially responsible investing”; an investment discipline that considers environmental, social and corporate governance (ESG) criteria to generate long-term competitive financial returns and positive societal impact (US SIF). This blanket term covers any type of investment process that combines investors’ financial objectives with their concerns about ESG issues. Investment managers who build SRI portfolios do so for two reasons: because clients want their investments to be forward-looking and maintained in line with their concerns and values, and because research shows that a company’s integration of environmental, social and governance factors often results in outperformance of its peers.



Fossil Free Funds

A free online tool created by As You Sow and Morningstar that enables people to find out if their mutual fund holdings, in the form of individual investments or an employer-provided 401(k), are being used to extract and consume fossil fuels.

Fossil Free Funds describes their tool’s rationale:
Owning investments in coal companies, oil/gas producers, and fossil-fired utilities isn’t just a moral question. Fossil fuel investments carry real financial risks. When emissions are constrained, fossil fuel companies will have their carbon assets stranded. The implication is that they’re massively overvalued, and markets are realizing that investing in fossil fuels is a risky bet. Fossil Free Funds empowers investors to know exactly what they own, to see if their savings are invested in dirty energy sources, and to find investment options that support a cleaner, greener future.

Morningstar Sustainability Rating

Morningstar Sustainability Rating

A rating developed by Morningstar and Sustainalytics that enables investors to evaluate mutual funds and exchange-traded funds based on how well the companies in the portfolio are managing environmental, social and governance (ESG) risks.

Using the free website, any consumer or wealth advisor can look up a mutual fund and see its rating. The rating is in the middle, right-hand side of the screen and is denoted by the number of ‘globes’ on a 1-5 rating basis. We encourage everyone to look at their 401(k), IRA or other investment statements to see what funds you hold and enter those funds into to see how sustainable (or not) your funds truly are.


Important Disclosures