Sustainable Investing
Sustainable Investing is an umbrella term encompassing the emerging fields of environmentally and socially responsible investment practices and strategies. Best practices in sustainable investing are currently being defined, developed and tested as the field is gaining scope and acceptance. Therefore, this requires new strategies and skill-sets.
Sustainable investing can be subdivided into three important practices and strategies.
1. Positive and negative screening strategies.
Positive screening selects and allows the prioritization of stocks based on factors such as ESG scores or a low carbon footprint. Negative screening, inversely, seeks to pinpoint stocks for ethical exclusions such as arms manufacturers, tobacco companies, or other sectors.
2. Thematic strategies.
These themes are typically either focused on social or environmental considerations. Portfolio construction is often based on environmental and societal values exhibited by specific sectors or companies.
3. ESG factor integration practice.
ESG is simply an acronym that stands for Environmental, Social, and Governance. As a practice, investment managers work to identify and evaluate ESG factors to identify risks and opportunities that traditional investment analysis often overlooks. Portfolio construction is driven by traditional financial factors as well as material ESG factors. In identifying ESG issues early and incorporating the information into investment decisions, long term risk adjusted returns can be enhanced.
Alongside integrating ESG factors into their investment process, responsible investors also practice active ownership to help their investee companies to develop more sustainable practices. They do this through engagement with corporate boards and senior management and through proxy voting.
Confused by all this? You should be because there is still disagreement amongst the “experts” on how the world of sustainable investing is defined and carried out.
Demeter Advisors can help you better understand the ESG attributes of your present portfolio. We can serve asset owners to set the desired direction of the investment of their capital. And we can assist asset managers to refine the analysis and implementation of ESG factor integration practices.