As the popularity of ESG investing soars, the range of ESG strategies available to advisers continues to multiply. Here are five approaches to consider.
ESG investing has become a major trend among Australian advice clients. This approach factor in people, society and the environment, along with financial performance, when making and managing investments.
In its earliest stages, ‘ESG investing’ simply meant not investing in businesses involved in controversial goods or services that harmed people or the planet – such as fossil fuels, tobacco or weapons.
Many funds and investment managers still take this approach, but there are other strategies to consider.
Investment strategies may look to generate returns by focusing on ESG-related themes and market trends; others prioritise investments with demonstrably positive impacts on their communities and the environment.
Advisers can tailor a solution from these strategies that aligns to a client’s personal values and responsible investment goals.
Here, we look at some of the more common ESG approaches and how they differ.
Five ESG investing approaches
- ESG integration refers to the systematic and explicit inclusion of ESG risks into investment analyses. This strategy can help investment managers adjust their earnings forecasts and valuations by factoring in ESG risks.
Importantly, ESG integration can also help identify new investment opportunities, or highlight potentially material ESG issues which investment managers may need to raise with companies’ management.
- Screening is simply a way for investment managers to better define their investible universe. There are two ways screening can be applied:
1. Negative screening, which excludes businesses whose industries are not considered ‘responsible/ethical’ – common examples include gambling, weapons, tobacco, and fossil fuels.
2. Positive screening, where investment managers ‘tilt’ their portfolios to favour businesses with better ESG performance. For example, this could mean allocating a greater portion of capital earmarked for energy stocks towards businesses developing renewable energy technology.
In short, negatively screened portfolios focus on minimising negative outcomes, while positively screened portfolios try to actively drive good outcomes.
- Thematic investing looks to generate returns by targeting businesses within a particular market ‘theme’. These themes can include ESG-aligned goals.
For example, an investment theme could be climate change, and could include climate-responsible products and businesses with eco-friendly credentials.
Investing in line with this theme can theoretically meet an investor’s ESG goals while still generating returns.
The Responsible Investment Association Australasia (RIAA) found these sorts of sustainability-linked products grew their funds under management from $76 billion to $161 billion between 2020 and 2021 alone.1
- Impact investing is investing in businesses to create societal and environmental improvements along with investment returns. Typically, investments in these businesses are accompanied with specific metrics to track the impact they’re having.
An example would be companies developing affordable housing projects – in addition to creating value for shareholders, these businesses can show the verifiable impact their activity has in neighbourhoods where their projects are being built.
- Active ownership is when investment managers work with the managers of a company on improving their understanding of the company’s ESG footprint thus ensuring the company’s long-term goals align with those of its investors.
The term can also refer to the use of proxy voting, shareholder resolutions, or even class action lawsuits to pressure companies to improve their track record.
To learn more about our sustainable portfolio series, reach out to a North Business Development Manager.
1. Banhalmi-Zakar Z, Goodwin M, Parker E et al, Responsible Investment Benchmark Report 2022 Australia, Responsible Investment Association Australasia, September 2022, accessed 24 February 2023.
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