With investors insisting that the environmental and social impact of portfolios be weighed similarly to performance, a major shift is occurring in the investment management sector. Consequently, ESG and green investing strategy have become prevalent as key elements for long-term investment success and business operations. ESG investors now view it essential to integrate material ESG factors into their investments, while seeking methods to quantify and enhance their overall effect.

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ESG Investing

An ESG investment strategy motivates investors to put their money into businesses that have a positive environmental and social impact, while being operated by management teams who prioritise reaching corresponding objectives through transparent corporate governance practices. ESG stands for ‘environmental, social, and governance’ - the three fundamental pillars of this type of investing.

The term encompasses various approaches whereby ESG considerations are prioritised, meaning this can cover 'sustainable investing', 'socially responsible investing', or 'impact investing'.

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Global Rise Of ESG Assets

In 2020, the global sustainable investment market skyrocketed to an impressive $35.3tn,  according to Global Sustainable Investment's annual review report - a significant 15% growth over 2018-20 and 55% growth over 2016-20. Currently, ESG investments account for 35.9% of professionally managed assets, worth in excess of $98tn. If this trend continues at its projected rate of 15%, we can expect that number to reach as much as $50tn by 2025.

In 2018-20, most regions experienced an expansion in sustainable investment assets; Canada saw the highest surge (48%), followed by the US (42%), Japan (34%) and Australasia (25%). However, due to a modification in data collection techniques employed for European records featured on the 2020 report, Europe noticed its sustainably invested funds drop 13% from 2018.

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Best ESG Investment Strategies 

When constructing an ESG portfolio, there are seven crucial investment approaches to keep in mind. Since ESG investing is still quite novel, there aren't any formal rules with regards to incorporating ESG practices into decisions; thus asset managers should determine an ESG strategy that best corresponds with their aims. The following is an overview of the top globally employed ESG strategy examples.

1. ESG Integration

By combining ESG elements into the conventional financial analysis, investors can uncover companies that are better equipped to tackle potential risks and seize desirable opportunities associated with environmental, social and governance factors. Investing intelligently requires a comprehensive understanding of these criteria; thus, investing wisely means leveraging information gleaned from ESG scores, ratings and data.

2. Corporate Engagement and Shareholder Action

Harnessing their voting power as shareholders, investors can influence corporate policy and behaviour to bolster ESG performance. This strategy involves engaging with companies to encourage them to decrease carbon emissions, reinforce labour standards, and advance diversity & inclusion in the workplace among other initiatives.

3. Norms-based Screening

Investors can take strides in promoting international standards and norms by excluding companies that are involved in activities such as human rights abuses, corruption, environmental destruction, etc. This strategy is guided by United Nations Global Compact principles, the Universal Declaration of Human Rights rules and regulations based on the Paris Agreement concerning climate change. By avoiding these types of companies you can contribute to global progress.

4. Negative/Exclusionary Screening

Through this technique, investors can choose to omit certain companies from their investment portfolio based on ESG criteria such as fossil fuel producers, tobacco manufacturers and weapon makers. This enables individuals to avoid businesses that are linked with damaging practices or products of contention.

5. Best-in-Class/Positive Screening

Investing strategically in enterprises that surpass their competitors in ESG performance is a smart way to go. By carefully observing business operations for signs of leadership regarding renewable energy, employee satisfaction ratings and product safety, you can be sure you're investing well.

6. Sustainability-Themed/Thematic Investing

Investing in businesses that promote sustainability objectives, such as renewable energy, sustainable agriculture and water conservation is an effective way to support organisations striving towards beneficial environmental and societal outcomes.

Takeaway

The worldwide quest for green investing strategy is ever-growing, allowing investors to gain further insight into different ESG plans that will assist them in achieving their individual objectives - from risk/reward assessment and selecting top-performing ESG funds, to making a tangible ecological impact.

When choosing an ESG investment strategy, consider your firm's existing infrastructure, processes and ideals along with yours and your client’s rationale when it comes to these factors. Then select the plan that fits best in order to build portfolios which will yield impressive financial returns while also making a positive difference for society.

Read more ESG investor news and views here.

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Frequently Asked Questions (FAQs)

What is an ESG investment strategy?

ESG strategy is a way of investing that measures the environmental and societal impact of businesses. It evaluates their performance in those areas to determine whether or not one should invest in them. By using this data-driven approach you can be sure your portfolio aligns with your values while still achieving market returns.

What are the four strategies of ESG investing?

ESG investing involves four distinct techniques to achieve success: exclusionary screening, positive selection, ESG integration and impact investment. Exclusionary screening entails avoiding investment in businesses that are considered controversial or have detrimental practices; whereas the process of positive selection centres on allocating funds towards companies with demonstrated excellence regarding their environmental, social and corporate governance (ESG). Furthermore, integrating these factors into traditional financial analysis is known as ESG Integration, while Impact Investment concentrates on funding initiatives which include a significant beneficial effect either socially or environmentally.

What are common ESG strategies?

To achieve ESG compliance, investors may opt to invest in companies exhibiting exemplary standards of governance and sustainability, evade those with unsavoury or contentious practices, interact with firms to ensure improved performance across their ESG metrics and ultimately support businesses that are making a positive impact on our planet and its people.

What are the 3 essential pillars of ESG?

A successful ESG strategy is supported by three core components: environmental, social and governance factors. When examining a company from an environmental standpoint, we evaluate their impact on the natural world - like carbon emissions and waste management. Additionally when assessing a firm's social aspect we examine elements such as labour ethics or community engagement initiatives. Lastly for governance considerations, board diversity and executive compensation are taken into account to ascertain effectiveness of leadership & managerial procedures.