ESG Incorporation

A key strategy of sustainable and responsible investing is incorporating environmental, social and corporate governance (ESG) criteria into investment analysis and portfolio construction across a range of asset classes. An important segment of ESG incorporation, community investing, seeks explicitly to finance projects or institutions that will serve poor and underserved communities in the United States and overseas.
In ESG incorporation, investment institutions complement traditional, quantitative techniques of analyzing financial risk and return with qualitative and quantitative analyses of ESG policies, performance, practices and impacts. 
Asset managers and asset owners can incorporate ESG issues into the investment process in a variety of ways. Some may actively seek to include companies that have stronger ESG policies and practices in their portfolios, or to exclude or avoid companies with poor ESG track records. Others may incorporate ESG factors to benchmark corporations to peers or to identify “best-in-class” investment opportunities based on ESG issues. Still other responsible investors integrate ESG factors into the investment process as part of a wider evaluation of risk and return.
These examples of ESG incorporation strategies can be summarized as follows:

  • Positive/best-in-class: Investment in sectors, companies or projects selected for positive ESG performance relative to industry peers. This also includes avoiding companies that do not meet certain ESG performance thresholds.
  • Negative/exclusionary screening: The exclusion from a fund or plan of certain sectors or companies involved in activities deemed unacceptable or controversial.
  • ESG integration: The systematic and explicit inclusion by investment managers of ESG factors into traditional financial analysis.
  • Impact investing: Targeted investments, typically made in private markets, aimed at solving social or environmental problems.
  • Sustainability themed investing: The selection of assets specifically related to sustainability in single- or multi-themed funds.

The survey of money managers and asset owners conducted for the US SIF Foundation’s Report on US Sustainable, Responsible and Impact Investing Trends asked respondents to describe their approach to ESG incorporation. Among money managers, assets involved in ESG integration jumped significantly from $614 billion in 2012 to $4.7 trillion in 2014. To learn more about the explosion in growth of this investment approach, see the US SIF Foundation's report Unlocking ESG Integration here. Assets involved in negative/exclusionary screening, the primary ESG incorporation strategy in 2012, came close behind in 2014 with $4.4 trillion. 

The majority of asset owners, on the other hand, reported that they practice negative/exclusionary screening, covering $1.2 trillion in assets (particularly relating to the conflict in Sudan and other terrorist/repressive regimes).