Environmental, Social, and Governance (ESG) factors are rapidly rising in investor cognizance worldwide. But it isn’t just conscientious backers and philanthropists filtering for ESG. When it comes to business; sustainability, equality, and a clean environmental record are essential facets of financial performance—and savvy investors are starting to embrace these determinants.
ESG factors are used in public market portfolios in a variety of ways, with some active managers using ESG factors as an integrated part of their fundamental approach to investing. These investors posit that a focus on companies with better ESG practices, in addition to good financial characteristics, will potentially lead to better risk management or may result in alpha generation. In passive portfolios1, however, an investor can choose to use ESG factors to better align a portfolio with his or her values, for example by emphasizing certain characteristics (e.g., companies with better human rights practices, or a higher “S” score), or de-emphasizing certain characteristics (e.g., companies with lower carbon emissions, or a higher “E” score). As opposed to active managers, which generally look for financially material ways to integrate ESG factors into their investing process, passive investors are generally looking for financially immaterial ways to integrate ESG factors.
For more information, visit these websites:
https://www.cfainstitute.org/en/research/esg-investing
https://www.nasdaq.com/articles/the-importance-of-esg-factors-in-investment-decisions-2020-03-19
