What is ESG investing?

Understanding the core concepts of sustainable investment

ESG investing can be described as a strategy that incorporates environmental, social and governance (ESG) factors into its investment process. Incorporating ESG risk analysis into research is an important tool to understand the true value of an investment, mitigating risk, and identifying new opportunities.

ESG investing was a relatively small market until the early 2000s, when investors and asset managers began to acknowledge that ESG issues had the potential to materially affect corporate performance and, in turn, investor returns over the long term.

During the early days of ESG investing in the 1970s, portfolios were primarily built around exclusionary screens. Companies that engaged in questionable environmental practices or that had a detrimental impact on society—tobacco companies or weapons manufacturers, for example—were removed from a portfolio manager's investment universe.

Over the years, as ESG investing gained more of a foothold and pressure increased for corporations to be increasingly transparent about their social and environmental impact, asset managers began adding a second, positive screen to their investment processes.

Rather than simply excluding companies that scored low on ESG metrics, managers were able to begin tilting portfolios in favor of companies that were performing well on ESG criteria. Many ESG investors have now moved beyond portfolio construction to leverage their position as stockholders in order to influence public policy and corporate behavior.

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