What is ESG?
ESG investing is a term that is often used interchangeably with sustainable investing, socially responsible investing, mission-related investing, or screening.
What are the common investor objectives?
When it comes to ESG investing, one size does not fit all. Under the ESG investing umbrella, we have identified three common investor objectives or motivations when considering an ESG strategy: Integration, Values and Impact.
In order to achieve these objectives, investors may pursue different approaches such as ESG integration, exclusionary or negative screening, or thematic investing, to name a few. Here we share the differences between socially responsible investing (SRI), values-based investing, impact investing, and other commonly used terms in the market.
Integration
Objective:
Investing with a systematic and explicit inclusion of ESG risks and opportunities with the intention to enhance long-term risk-adjusted returns.
Common approaches:
Bottom-up ESG integration
Investing with a systematic and explicit inclusion of ESG risks and opportunities in investment analysis.
Top-down ESG integration
Investing with a systematic and explicit inclusion of ESG factors in portfolio construction.
Best-in-class selection
Preferring companies with better or improving ESG profiles relative to sector peers.
Thematic investing
Investing based on trends or structural shifts, such as social, industrial and demographic trends.
Active ownership
Entering into a dialogue with companies on ESG issues and exercising both ownership rights and voice to effect change.
Why is ESG Growth Accelerating?
Global sustainability challenges such as flood risk and rising sea levels, privacy and data security, demographic shifts, and regulatory pressures, are introducing new risk factors for investors that may not have been seen previously. As companies face rising complexity on a global scale, investors may reevaluate traditional investment approaches.
- The world is changingGlobal challenges, such as climate risk, increased regulatory pressures, social and demographic shifts and privacy and data security concerns, represent new or increasing risks for investors. The economic pressure the COVID-19 pandemic has placed on some industries has affected companies’ exposure to ESG risks and their ability to manage them. Companies face rising complexities and greater scrutiny if they are not adequately managing their ESG or climate risk.
- A new generation of investorsThe interest from millennial investors around the world has already helped drive the rapid growth in ESG investment. In a 2018 survey, Bank of America Merrill Lynch said that they could “conservatively estimate” USD 20 trillion of assets growth in U.S.-domiciled ESG funds alone over the next two decades.1
- Better data and technology for more meaningful insightsAdvanced technology, including artificial intelligence (AI) and alternative data extraction techniques help minimize our reliance on voluntary disclosure from companies. Machine learning and natural language processing help us increase the timeliness and precision of data collection, analysis and validation to deliver dynamic content and financially relevant ESG insights.
