What is ESG?
Clarifying the confusion
- The adoption of environmental, social and governance (ESG) investing continues to accelerate as more investors seek out investments that reflect their humanitarian, ethical, environmental and social values. Definitions and approaches to ESG vary widely; no universal ESG strategy exists.
- Given the many ways ESG considerations manifest in investment funds, it can be helpful for investors to be familiar with the range of approaches on offer
- Below we describe four of the most commonly-used ESG investing strategies that investors, institutions or companies may engage in.
Investing strategies
Portfolio screening
This method selects investments from a universe of investments that meet specific screening criteria. There are two key types of portfolio screening:
1. Exclusionary (or negative screening)
Exclusionary-screened investments exclude certain sectors, countries, and securities from an investment universe based on specific ESG-related criteria.
2. Inclusionary (or positive screening)
Proactive investment in sectors or companies selected for higher ESG rating relative to industry peers or other opportunities.
Impact investing
Targeted investments with the dual objective of generating ESG-related impact in addition to some level of financial return.
ESG integration
The assessment of financially material ESG information in the investment research and decision-making process.
Active ownership
The use of various resources (internal or external) to positively influence corporate behaviour on ESG-related issues. This can include advocacy efforts, engagement with corporate decision-makers and voting in support of good governance.