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Approaches to ESG Implementation

September 5, 2017 | Global/Emerging Markets

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With the majority of investors believing it makes sense to incorporate environmental, social, and governance (ESG) factors into investment decisions, and surveys highlighting significant growth in ESG adoption by both asset owners and consultants, let's look at approaches to ESG implementation.

The Global Sustainable Investment Alliance (GSIA) definitions of sustainable investment have emerged as a global standard of classification, according to GSIA's 2016 Global Sustainable Investment Review.

  • Negative/exclusionary screening: The exclusion from a fund or portfolio of certain sectors, companies, or practices based on specific ESG criteria.
  • Positive/best-in-class screening: Investment in sectors, companies, or projects selected for positive ESG performance relative to industry peers.
  • Norms-based screening: Screening of investments against minimum standards of business practice based on international norms.
  • ESG integration: The systematic and explicit inclusion by investment managers of environmental, social, and governance factors into financial analysis.
  • Sustainability themed investing: Investment in themes or assets specifically related to sustainability (such as clean energy, green technology, or sustainable agriculture).
  • Impact/community investing: Targeted investments, typically made in private markets, 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.
  • Corporate engagement and shareholder action: The use of shareholder power to influence corporate behavior, including through direct corporate engagement (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.

According to the GSIA, the dominant ESG adoption strategies, measured by assets, are negative or exclusionary screening and ESG integration, as shown below. Implementation via exclusionary screening has been more popular in Europe, while ESG integration has been the more prominent implementation method in the United States.

It is also interesting to see the growth in these strategies over the past two years ending December 2016. Growth has been strong across implementation methods, but impact/community investing and sustainability-themed investing stand out.

Certainly, this is an area on which tour high-net-worth and endowment/foundation clients are already focused.

In future posts, my colleague Vivian Thurston will describe our ESG journey at William Blair, providing some examples from the consumer sectors.