If you want to get into ESG investing, there are different types of investment strategies you can follow. The ESG considerations will vary by investment strategy, industry, and client objectives. There are several tools out there that can help you pick and fine-tune your strategy. These include ESG ratings, ESG indexes and some other online ESG tools, like screeners. Before you start investing, make sure you're up-to-date on EU laws and US regulations. Note that several stock exchanges promote ESG investing, too.
A portfolio manager’s ESG practices may significantly influence performance. Because securities may be included or excluded based on ESG factors rather than other investment methodologies, the fund’s performance may differ (either higher or lower) from the overall market or comparable funds that do not employ similar ESG practices.
US Securities and Exhange Commission
To help you decide which strategy is right for you, we compiled a list of the top 5 ESG investment strategies. You can combine these strategies and use them across different asset classes.
Screening is applying filters to potential investments to rule companies in or out based on an investor’s preferences and values.
Inclusionary screening means the inclusion of companies with higher ESG scores. This strategy may tilt the portfolio toward, for example, “Best in class'' firms, which are companies outperforming in ESG measures. Other fund managers may use a strategy targeting "ESG momentum," which includes companies improving ESG measures faster than peers.
Always check the ranking threshold of your chosen funds. Portfolios allowing the top performing 40% of the sector are a lot different from those allowing only the top 5%.
This investment approach is based on the exclusion of companies, sectors and governments whose behaviors do not align with ESG principles. These can be weapon manufacturers, tobacco producers, gambling firms or sanctioned countries.
If you want to invest in a fund that uses this strategy, don’t forget to check the tolerance level of the fund. Some portfolios may tolerate more than half of their revenues coming from excluded industries, countries or business practices!
Thematic ESG investing
Thematic investing focuses on a particular theme within one of three main ESG areas, namely Environmental, Social or Governance. Funds put together on the basis of thematic investing include companies that aim to address specific themes like clean energy, climate risk, labor issues, data security, female leadership, and board diversity.
This strategy targets a measurable and positive social or environmental impact in addition to financial returns.
Impact investing provides capital to address the world’s major challenges in sectors such as sustainable agriculture, renewable energy, healthcare and education.
This strategy incorporates ESG data along traditional financial analysis into the securities selection process and investment decisions. Rather than simply applying exclusionary or inclusionary screening based on ESG information, investment decisions are made by taking financially material ESG information into account. Material ESG issues are those that are considered highly likely to affect corporate and investment performance:
The PRI defines ESG integration as “the explicit and systematic inclusion of ESG issues in investment analysis and investment decisions.” Put another way, ESG integration is the analysis of all material factors in investment analysis and investment decisions, including environmental, social, and governance (ESG) factors.
PRI (Principles for Responsible Investment)