This is consistent with the approach advocated through the Principles for Responsible Investment (PRI), considered the foremost guide in the implementation of ESG information to investment strategies. More than 1,500 organizations with over $60 trillion in AUM have signed onto the PRI’s “Six Principles.” The stated goal of the organization is to encourage the “incorporation of ESG standards into investment decisions, to better manage risk and generate sustainable, long-term returns.” It pointedly notes that ESG investing “does not require ruling out investment in any sector or company. It simply involves including ESG information as part of investment decision-making, to ensure that all relevant factors are accounted for when assessing risk and return.”
ESG data can be used to construct portfolios reflecting whatever set of concerns are given priority by the investor, the advisor, or the portfolio manager. Strategies include identifying best in class companies or sectors; excluding lower rated companies; sustainability themed investing; or simply integrating ESG data and analysis into traditional financial analysis. In alternative funds, ESG is increasingly finding its way into strategies focused on shareholder activism, and impact investing.
Clearly, responsible investing is more than a passing fad. The CAIA survey found that 77 percent of respondents thought that responsible investing had grown in significance in the prior three years, and a like number thought it would be even more significant three years from now. The keys to growth: industry standards and investment performance, among other factors. An important first step in establishing standards will be to better clarify the key differences between ESG and SRI, so investors will be better educated and able to drill down into the approaches of each of these new funds and approaches coming to market.
Ben Webster is the CEO of OWLshares, a provider of research, analytics and index creation services focused on environmental, social and governance (ESG) data.