It is vital in understanding the different approaches related to sustainable investing. While standards and definitions continually evolve, there are generally six approaches to sustainable investing. Depending on an investor’s motivation in considering sustainable investing, some approaches may be more relevant than others.
In very general terms, the approaches further down the list imply a shift in balance towards societal values and less emphasis on economic value.
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ESG Incorporation relates to the consideration of material ESG factors in the investment decision making process. For asset managers, this can be achieved within any of the three broad stages of the investment process: defining the investable universe, security level analysis, and portfolio construction. The primary goal of this approach is to improve longer term risk-adjusted returns. |
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Positive/Best In Class Screening focuses on companies and issuers that perform better than peers on one or more ESG related risk metrics. Similar to ESG incorporation, the primary goal is to improve longer term risk-adjusted returns. |
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Negative/Exclusionary Screening excludes securities, issuers, or companies from a specific investment strategy based on certain ESG-related activities, business practices, or business segments. The traditional SRI strategies discussed above typically fall into this approach, but negative screening may also be considered a modern approach if the focus is on financially material ESG factors. |
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Active Ownership and Engagement uses rights and position of ownership to influence issuers’ or companies’ activities or behaviors. Direct engagement is typically more successful for larger asset management firms controlling larger blocks of a company’s shares. Smaller investors can join collaborative engagement groups to aggregate their influence. Goals are to influence a company’s ESG related activities or to improve transparency in ESG factor reporting. | |
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Thematic Focus strategies tend to invest in sectors, industries, or companies expected to benefit from long-term macro or structural ESG-related trends and typically focus on one area of interest. Examples include clean energy, sustainable resources, social diversity, and women in leadership. It is important to note that a strategy may score well in its area of focus, but score poorly on other ESG metrics. |
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Impact strategies aim to generate a positive, measurable social or environmental impact alongside a positive financial return. It is not uncommon that financial returns will trail market returns, as performance may be partially sacrificed to achieve the impact goal. | |
These approaches are not mutually exclusive and a product/strategy may employ more than one approach. They also typically complement traditional financial analysis and should not be considered a replacement.
| Empire Life Global Sustainable Equity GIF uses ESG incorporation and a best-in-class approach. Read more about Empire Life's ESG philosophy. |
Related articles:
Sustainable investing: Common myths and misconceptions
Sustainable investing: Common myths and misconceptions - Part 3
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This article reflects the views of Empire Life as of the date published. The information in this article is for general information purposes only and is not to be construed as providing legal, tax, financial or professional advice. The Empire Life Insurance Company assumes no responsibility for any reliance on or misuse or omissions of the information contained in this document. Please seek professional advice before making any decisions.
July 2021