Introduction to ESG investing

In the past, environmental, social, and governance (ESG) considerations were once confined to a niche group of ethical investors. However, times have changed significantly.

Today, the integration of ESG factors has become an essential aspect of investment management. Both asset owners and investment managers are actively exploring methods to include ESG criteria in their investment analysis and decision-making processes. Influential advocates for responsible investing, such as the United Nations Principles for Responsible Investment (PRI), have catalyzed a fundamental shift in investment practices. Investors are now explicitly incorporating ESG factor analysis to improve returns and effectively manage risks. Societal and client demands, coupled with compelling evidence of the direct financial benefits of ESG analysis, have propelled integration into the mainstream.

ESG investing isn't just about making a difference in the world; it's about making sound financial decisions that align with your values. By investing in companies that care about the environment, society, and good governance, you're choosing to invest in the future you want to create.

Although ESG is becoming mainstream, there is still no universal standard for assigning Environment, Social, and Governance issues. Each depend on the businesses, investors and their audience.

• Environmental components cover the use of and interaction with renewable and non-renewable natural resources (water, minerals, ecosystems, and biodiversity). Covering issues such as : climate change, resource depletion, waste pollution, deforestation, water security.
• Social aspects address the management of human capital, local communities, and clients. Main issues being : human rights, child labor, working conditions, labor standards, modern slavery, health, safety, customer responsibility..
• Governance factors measure the compliance with jurisdictions, international standards and common industry practice. Issues in scope : corporate governance (board diversity and structure), remuneration, bribery, corruption, lobbying, donations, tax transparence, risk management

Responsible investors use various ways to combine ESG factors with traditional financial analysis and portfolio construction techniques, to achieve financial returns and social impact. Sustainable funds are often compared to benchmarks as baselines to highlight ESG outperformances and better understand returns (attributed to securities selections).

Responsible Investment includes a variety of flavours :

• Socially Responsible (also known as SRI : use social and environmental selection criteria's)
• Sustainable (focus on minimizing natural and social resource depletion)
• Green (recycling, waste management, resource inefficiency)
• Impact (help achieve one (or more) of the 17 UN Sustainable Development Goals)
• Social (health care, micro finance)
• Ethical and faith-based (sharia compliant, Christian values..)
• Thematic (such as : clean energy, affordable housing, financial inclusion)

Final thoughts

ESG investing is a long-term investment strategy that focuses on companies that are committed to environmental, social, and governance (ESG) principles. Those companies :

• are less likely to be exposed to environmental, social, and governance risks.
• are more innovative and efficient
• adopt practices that are good for the environment and society
• create a more sustainable and equitable world

However, there has been some backlash against ESG investing, with some critics arguing that it is too focused on social and political issues, and that it can lead to lower returns.