INVESTMENTS
THE MAIN PRINCIPLES OF ESG INVESTING
Patrick Norwood Fund Analyst and Consultant Defaqto
Environmental , social and governance investing has continued
to grow strongly in terms of both assets flowing into funds and investment vehicles available . This interest has , if anything , increased since the start of the COVID-19 crisis . Traditionally , ethical investing was just negative / exclusionary screening - the screening out of companies or even industries based on specific criteria , such as a significant portion of the firm ’ s profit coming from alcohol , gambling , tobacco , or weapons ; or the company using animal testing or child labour . As an evolution of this , ESG investing involves searching out and including companies based on desired ESG characteristics rather than just excluding firms with undesirable business activities . The approach involves a systematic consideration of specified ESG issues throughout the entire investment process to increase returns and reduce risk .
IA responsible investment framework Under the Investment Association ’ s ( IA ) responsible investment framework , there are three different levels to ESG investing :
1 . Exclusions Similar to the ethical investing described above , this involves the exclusion of investments in certain companies and sectors from the fund or portfolio based on pre-defined criteria .
2 . Sustainability The focus on investment in companies based on their fulfilling certain sustainability criteria and / or delivering on specific sustainability outcomes .
This can take the form of positive screening , where the investment manager looks for businesses that are ‘ best-in-class ’ based on ESG ratings . Or sustainability-themed investing , where investment is made in companies that target specific sustainability themes , such as climate change mitigation , pollution prevention sustainability solutions , and approaches that relate to one or more of the UN Sustainable Development Goals ( SDGs ).
3 . Impact investing An investment to generate a positive and measurable social or environmental impact . Examples include : a social bond fund which invests in bonds whose funding is ring-fenced for projects or initiatives that have the intention of generating positive and measurable social or environmental impacts ; investing in private equity where it demonstrates the money invested will go towards having a positive social or environmental impact ; and SDG impact funds where the impact is measured against the UN SDGs .
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