For those looking to make a positive impact on the world and obtain a solid return on their investments, sustainable investing is an increasingly popular option. Sustainable investing, also known as ESG (environmental, social and governance) investing, is a strategy that takes into account environmental, social and governance factors when making investment decisions. This article will provide an overview of the four main strategies of sustainable investing: negative evaluation, positive evaluation, portfolio tilt and ESG integration. Negative evaluation, also called exclusionary evaluation, is the process of excluding specific companies or sectors from a fund or portfolio.
This is done by determining the exclusion criteria in advance based on a specific objective. For example, an investor may choose to exclude companies that are involved in the production of fossil fuels or those with poor labor practices. Positive evaluation, also called best-in-class evaluation, is the process of selecting a subset of best-performing companies from a defined industry and a set of characteristics in which to invest. This can be considered as the opposite of a negative evaluation.
Instead of setting criteria to exclude companies, you predetermine what performance measures you'll use to select the best-performing companies. For example, you can invest in the 10 clothing companies with the lowest carbon footprint or in the five appliance companies with the most diverse boards of directors. A portfolio tilt strategy is one in which the investor “tilts” the percentage of ESG investments in a portfolio to be higher than that of non-ESG investments, while maintaining sectoral weightings that match the target index. You can choose this option as a relatively low-risk investment strategy that continues to prioritize ESG objectives. ESG integration is a strategic perspective that positions companies with high ESG ratings as investment opportunities that can increase the return of a portfolio. Rather than defining a specific set of requirements, as is the case with positive and negative evaluations, this strategy incorporates ESG considerations into the company's existing investment process. Shareholder action, also known as commitment, occurs when investors use their power to encourage the companies in which they invest to seek significant ESG opportunities.
This strategy is similar to positive evaluation, but instead of selecting the companies with the best performance, an index is created. In addition, positive evaluation can be applied to any ESG factor, while sustainability-themed investment is specific to issues related to the environment. The governance aspect of sustainable investment focuses on companies that promote business ethics, as well as trust, transparency and compliance in the market. The social aspect of sustainable investment analyzes causes that take into account human rights and concerns about diversity. Once you've determined the types of sustainable investment strategies that interest you, it's time to begin your portfolio transition. These approaches, which represent a dynamic set of implementation tools, allow asset owners to adapt their sustainable investment activities by asset class and adjust the underlying criteria over time. Adequate governance constitutes the operational backbone to support implementation and to define, communicate and meet sustainable investment objectives.
Organizations must first define the reasons why they want to integrate sustainability factors into their investment processes. We expect investment options and sustainability-related data to change rapidly in the coming years. Sustainable investing has become an increasingly popular option for those looking for ways to make a positive impact on the world while obtaining a solid return on their investments. By understanding and utilizing these four strategies – negative evaluation, positive evaluation, portfolio tilt and ESG integration – investors can create an effective sustainable investing plan that meets their individual goals and objectives.