ESG strategies

According to several scientific studies, the integration of ESG factors in a portfolio has a positive impact on performance and gives superior results. This positive contribution is confirmed not only in equity portfolios, but also in portfolios invested in government and corporate bonds or in alternative assets. In conclusion, taking ESG factors into account is a necessary condition for a successful investment strategy.

In this article, we will examine all the ESG strategies that investors can incorporate into their portfolios.

Companies that strategically respond to ESG issues perform better than others in both financial performance and non-financial measures, including customer satisfaction, talent attraction and innovation (Financial Times, 2018).
A comprehensive sustainable development strategy allows a company to address environmental and social risks and take advantage of the resulting business opportunities. To achieve this, it is necessary to have a good understanding of ESG strategies and to detail them to better understand the world of sustainable finance.

1.Exclusion/ Negative Screening:

The exclusion of a fund or a portfolio of certain sectors, companies, or practices based on specific ESG criteria (worst of its category).
Examples:

  • Systematic exclusion of issuers rated CCC
  • Exclusion of issuers rated BB, B and CCC
  • Sector exclusion (e.g., Energy)
  • Sub-industry exclusion (e.g., Coal & Consumable Fuels)
  • Exclusion list of individual issuers

2. Values/Norms-based Screening (and Red Flags):

Screening of investments against minimum standards of business practice based on international norms, such as those issued by the OECD, ILO, UN (Global Compact) and UNICEF
Examples:

  • Controversial sectors: controversial weapons, conventional weapons, civilian firearms, nuclear weapons, nuclear power, thermal coal, tobacco, alcohol, gambling, adult entertainment, genetically modified, fossil fuels production & reserves
  • Many ETF funds

3.Selection/Positive Screening:

Investment in sectors, companies or projects selected for positive ESG performance relative to industry peers (best-in-class)
Examples:

  • Selection of issuers rated AAA, AA and A
  • Selection of issuers that have improved their rating (Momentum ESG strategy)

4.Thematic/Sustainability Themed Investing:

Investment in themes or assets specifically related to sustainability (for example clean energy, green technology, or sustainable agriculture)
Examples:

  • Funds invested in Green Bonds
  • Funds invested in Social Bonds
  • Funds invested in Sustainable Infrastructure
  • Funds invested in Natural Ressources

5.ESG Integration:

The systematic and explicit inclusion by investment managers of environmental, social and governance factors into financial analysis
Examples :

  • The stock picking score is a mix (50/50) of a fundamental score and an ESG score
  • The fund must have an ESG score greater than the score of its benchmark

6.Corporate Engagement/Shareholder Action:

The use of shareholder power to influence corporate behavior, including through direct corporate engagement (i.e., communicating with senior management and/or boards of companies), filing or co-filing shareholder proposals, and proxy voting that is guided by comprehensive ESG guidelines.
Examples:

  • Voting policy
  • Public divestment
  • Biodiversity and deforestation financing
  • Engagement with target companies on a specific subject (e.g., pay ratio or living wage)
  • Escalated engagement: concerns public, proposing shareholder resolutions & litigation

7.Impact Investing:

Targeted investments aimed at solving social or environmental problems, and including community investing, where capital is specifically directed to traditionally underserved individuals or communities, as well as financing that is provided to businesses with a clear social or environmental purpose

Examples :

  • Funds with a Social Impact objective
  • Funds invested in Green Bonds

8.Impact Investing/Community Investing

  • Impact Investing
    Investing to achieve positive, social, and environmental impacts requires measuring and reporting against these impacts, demonstrating the intentionality of investor and underlying asset/investee, and demonstrating the investor contribution
  • Community Investing
    Where capital is specifically directed to traditionally underserved individuals or communities, as well as financing that is provided to businesses with a clear social or environmental purpose. Some community investing is impact investing, but community investing is broader and considers other forms of investing and targeted lending activities.
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