The Basics of Sustainable Investing Strategies

• ESG factors incorporated into traditional financial analysis
• How are different ESG inclusion strategies filling the gap?
• How do asset managers look at ESG?

Asset managers and corporate investors are always on the run to identify better and more accurate insights for their investment decision processes. When analyzing a company, these professionals are looking to pick companies that have advanced management practices, and present lower risks , and great future opportunities for shareholders. At the heart of it, asset managers seek to improve their analysis, especially in regards to generating a good risk-adjusted performance.  Asset managers use ESG factors to be better informed on holistic approaches to better position their investment decisions, generating long- term returns.

Negative screening, or exclusionary

Negative screening is one of the most common ESG strategies. Companies or issuers are simply excluded from a financial instrument, such as an index or a portfolio, due to defined ESG criteria. Common criteria include weapons, pornography, tobacco, nuclear power, carbon, and animal testing. Asset managers or asset owners can also systematically exclude entire sectors or countries from the investment universe.

Norm-based screening

Norm-based screening of investments occurs according to compliance and includes minimum standards of business practices and business norms. This strategy can also be considered exclusionary screening because it defines the investment universe as excluding companies that violate internationally accepted norms such as the OECD Guidelines and the UN Global Compact, among other frameworks that establish approved actions from companies.

Best-in-class

A best-in-class strategy consists of investing in sectors, companies, or projects that are best- performing within a universe. By selecting these assets based on ESG criteria, asset managers are leveraging and weighing the best performers compared to their peers.

ESG Integration

ESG integration includes the practice of integrating ESG factors into the investment decision-making process. Environmental, Social and Governance issues are incorporated by investors that seek companies who mitigate risks related to these themes and look for management opportunities.

Sustainability themed investing

The most common approach for this strategy is to invest in companies directly linked with an ESG issue through its supply chain, products, or other areas. This strategy allows asset managers to create thematic financial products such as a Climate change fund.

Impact investing

Impact investing prioritizes investments in companies, typically from the private market, that specifically target social or environmental problems. As the fastest-growing strategy, investments can be made through green bonds in both developed and emerging markets, offering a range of returns that are often project-specific. Impact investment includes microfinance, community investing, social business/entrepreneurship funds, and French fonds solidaires.

Engagement

Engagement is an activity undertaken by investors when exercising their rights as partial owners of a company. Through so-called “active ownership,” asset managers seek to engage with companies on ESG issues to influence behavior and increase disclosure.