The many facets of ESG investing

Though there is no standard classification in the industry for ESG investment strategies, there are 5 main ESG strategies: negative screening, positive screening, ESG integration, impact investing and active ownership. In 2020, the most popular strategies were ESG integration and negative screening. Impact investing was the least popular strategy of the five. 

• Negative screening aims to exclude companies or sectors that don’t align with an investor’s principles and values. This strategy was started by religious organizations in the US that, due to ethical considerations, didn’t want to invest in particular companies or industries such as alcohol, tobacco or weapons—the so-called “sin stocks”.  Over time, the exclusions have expanded to include oil and gas companies, mining and similar industries.

• Positive screening is about investing in companies that are top performers based on certain ESG criteria. With “best in class”, you invest in companies with the highest ESG scores. With “ESG momentum”, you invest in companies that improve their ESG scores faster than their peers. Lastly, with “thematic investing”, you invest in companies involved in a particular theme such as water, pollution, sustainable energy or gender equality.

• ESG integration is about incorporating material ESG factors (risks and opportunities) that are likely to affect a company’s operation and performance, as part of traditional fundamental analysis. ESG integration isn’t about excluding companies or industries but tends to overweight ESG-friendly companies while underweighting companies with less favorable ESG scores relative to a benchmark. 

• Active ownership (aka investment stewardship) involves engaging with companies’ boards of directors and management to drive positive changes related to ESG issues. This is done through discussions or by exercising voting rights. The larger the share ownership, the more influence one has, but any investor—even a small one—can be an active investor. 

• Impact investing is about having a measurable positive impact, where investors are willing to give up some return for the benefit of society and the environment. Investing is usually project based or is done through private equity funds. This strategy tends to be less liquid than the other ESG strategies. Investments can be made in public companies, private companies or non-profits that fund projects to fight poverty, eradicate hunger, offer affordable housing, provide education or support companies led by women. Making money is expected, but having a positive impact is a major consideration. Another increasingly popular way to make an impact is to invest in green, social, sustainable and sustainability-linked bonds.