Making sense of financial jargon

Do you know your friendshoring from your reshoring? How would you define amortisation and who can be accused of greenwashing?

The world of investing is already complicated but the various terms and buzzwords appearing every year can make it even more confusing.

Here we take a look at some of the latest terms that have been adopted, as well as revisiting some more established expressions.

Why do buzzwords appear?

Investment trends often create buzzwords that are used to describe events or ways of working if they’re not already covered by existing definitions. For example, many new terms are currently being used to describe the ways in which businesses are finding different ways of working with suppliers, distributors and customers. This has been partly triggered by the recent global crises, such as the fall-out from the Covid-19 pandemic and Russia’s invasion of Ukraine in early 2022.

Friendshoring

Friendshoring is one of the most recent terms to enter the investment dictionaries. It basically means routing supply chains via countries that are seen as less politically or economically risky. The idea is to help prevent possible disruption to businesses, in terms of both cashflow and public perception. Of course, this isn’t always easy. Plotting the best way of bringing raw materials to your factory and sending your goods out across the world is an art form these days.

Friendshoring can also be known as allyshoring.

Nearshoring

This happens when a company chooses to relocate a part of its business operations closer to home from a previously more distant location. For example, a company may decide to have its goods manufactured closer to its home base to ensure they can despatch the finished articles to customers more quickly. Nearshoring is also another way of solving the problem of having to navigate challenging parts of the world and coping with the various financial and time-related risks.

Reshoring

Reshoring effectively means going one step further than nearshoring. It’s when the business operation that had been moved overseas is brought back to where it was originally located. There are obviously pros and cons with this approach. The principal benefit is communication is easier if you’re all operating in the same time zone. However, there can be negatives. The initial decision to move offshore, for example, could have resulted in cost savings, whereas bringing them back could increase expenses.

Onshoring

This is very similar to reshoring and the terms are sometimes used interchangeably. However, there is a slight difference, according to some definitions.

Onshoring usually refers to a company that has decided it’s best to set up an operation within its own national borders. One of the main benefits is simplicity. They don’t have to worry about crossing borders and having to deal with political interference.

Offshoring

This isn’t exactly a new term. The idea of setting up part of a company’s operations overseas has been around for many years.

A prime example are western companies establishing manufacturing plants in countries where raw material costs may be lower. Similarly, many large firms have set up call centre operations overseas to take advantage of significantly cheaper labour costs.

ESG

This is an increasingly common expression and refers to the standards for ‘Environmental, Social, and Governance’ factors within a company.

Environmental includes policies related to climate change, while social covers how the business interacts with employees and customers. Governance, meanwhile, focuses on the leadership within the company, such as executive pay, the controls in place, and influence of shareholders.

Greenwashing

This is when a company – or investment fund – tries to make people believe it’s doing more to help the environment than it is in reality.

The term is regularly used to highlight scenarios whereby businesses attach phrases such as ‘environmentally friendly’ to their goods with no evidence to back up such claims. In the most serious cases, companies have been accused of making completely false or misleading statements about their green credentials in order to curry favour.

Amortisation (or amortization)

This is a term used in accounting and is a way to calculate the value of intangible business assets over various time periods. Amortisation involves spreading the cost of a loan – or an asset – over a specific timeframe, which is often the entirety of its useful life.

Depreciation, meanwhile, is a similar process but used for tangible assets, where the business can more easily compare its cost to the income it will help it earn.

M&A

This stands for Mergers & Acquisitions. It refers to transactions in which a company decides to either join forces with another organisation or buy them outright.

Mergers are when two businesses decide to consolidate into one more powerful operation, potentially combining different skillsets.

Acquisitions, meanwhile, are seen when one company buys another. In some cases, this can see them taking over a rival, while in others it’s adding a complementary operation.

Find out more about Quantitative Easing and Quantitative Tightening here. Or you can click for more on ESG, stagflation, or some spooky Halloween terms.