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ESG investing refers to the inclusion of environmental, social and governance factors in one or more parts of the investment process or product design.

Environmental: How companies and industries manage their impact on the environment. This could include climate change, deforestation, pollution and waste management.

Social: How a company or industry manages its impact on society. This could include how they treat employees and suppliers, community engagement and health and safety.

Governance: Whether a company has good business practices. These could include the diversity of a company’s board and leadership team, executive pay or how they handle tax.

When discussing the broader ESG investment landscape there are a variety of approaches to choose from, some having very different objectives. The five approaches to ESG investing described below are a useful starting point to understand the options available.

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Exclusionary portfolio screening

Excludes companies based on their products or business activities (e.g. tobacco and fossil fuels) that conflict with certain values.

Inclusionary portfolio screening

Invests in companies or sectors considered to be more effective in the management of ESG risks, including those demonstrating meaningful improvement in the management of those risks.

ESG integration

Systematic inclusion of material ESG information in investment analysis and decision making.

Impact investing

Targeted investments with the dual objective of generating financial return in addition to positive ESG-related impact.

Stewardship

The responsible use of proxy voting and engagement activities by institutional investors to maximise long-term value.
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Aligning investments with preferences

The adoption of ESG investing has accelerated as more investors seek out investments that reflect not only their financial goals but their personal preferences too.

ESG: Moving to the mainstream

ESG is no longer niche. Many companies now consider ESG matters to be at the heart of the sustainability of their business strategy and operational activities. It is a significant and growing part of the global finance sector.

A combination of factors has contributed to the advancement of ESG to the mainstream investing landscape.

Proliferating ESG data

Transparency and standardisation of ESG data is improving.

There are now more than 11,000 public companies worldwide disclosing ESG indicators.

Developing regulation

Global regulatory change is driving increased adoption of ESG products by larger institutional investors.

Regions like Australia where regulation has developed have seen increased ESG product adoption and growth.

Investor preferences

Investors are increasingly seeking social utility, or for their investments to align with their values, in addition to financial returns.

Research shows everyday investors - but millennials and women, in particular - view social and environmental impacts as important to their investing choices.

Investment rationale

Investors want social utility in addition to financial returns on their investments.

Recent studies show ESG having a neutral-to-positive impact on company performance. There are growing bodies of research that conclude ESG investing can achieve competitive rates of return.