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 screening: 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 financial analysis.
  • Impact investing: Targeted investments aimed at solving social or environmental problems.
  • Sustainability themed investing: The selection of assets specifically related to sustainability in single- or multi-themed funds.

An important segment, community investing, seeks explicitly to finance projects or institutions that will serve poor and underserved communities in the United States and overseas.

The survey of the of money managers and asset owners conducted for the US SIF Foundation’s Report on US Sustainable and Impact Investing Trends 2020 asked respondents to describe their approach to ESG incorporation. Of the 112 money managers that responded to this question out of 384 included in this report, the most commonly reported strategy in terms of the percentage of managers employing it and the ESG assets they represent, was ESG integration, at 74 percent and $3.5 trillion respectively. The second most reported strategy was negative or exclusionary screening, reported by 69 percent of this group of money managers, who collectively managed  $740 billion in ESG assets.

Within a subset of 60 institutional asset owners out of 530 captured in the report, ESG integration, practiced by 68 percent of the respondents, affects the largest portion of assets under management—at $495 billion. Negative/exclusionary screening strategies affect the second largest portion of assets under management, at $414 billion. Eighty percent of these institutional investors reported using impact investing. However, the assets they reported in this strategy were much lower: just $13 billion.