It is important to be clear in the language that you use around responsible and sustainable investment.
First up: ESG integration is a tool. It is not a discrete investment strategy.
There are different investment strategies that rely on ESG integration.
It is easiest to bracket these in the following three ways: responsible investing, sustainable investing and impact investing.
Traditional investment approaches paid no heed to ESG issues, regarding them as relevant only to ethical investing.
Responsible investing accepts that ESG factors are material to companies’ financial returns from a risk perspective.
A responsible investor takes ESG factors into account because of the impact they have on financial returns.
A sustainable investor also understands the materiality of ESG considerations and the impact on financial returns, but aims to invest in a way that actively captures the investment opportunities presented by the transition to more sustainable economies.
An impact investor goes one step further by investing in a way that positively contributes to the development of a more sustainable system, seeking a financial return as well as a positive impact on one or more of the UN’s sustainable development goals.
Some examples would probably help.
A responsible sovereign bond fund would incorporate ESG scores into its investment process in order to improve the accuracy of its analysis and to improve returns.
A sustainable sovereign bond fund might run a positive screen based on the same ESG scores to offer investors the opportunity just to invest in a more sustainable sovereign universe.
The impact fund would go one step further again, by investing in countries’ social or green bonds, where the proceeds were hypothecated for use in relation to specific social or environmental challenges.
The language that advisers use, and when and how they use it, matters.
There is increasing guidance from professional and trade bodies on how to have these conversations with clients, such as the Personal Finance Society’s good practice guide on impact investing.
In addition, CFA UK now offers a Certificate in ESG Investing that explains the rise of ESG investing, the nature of the different factors and how they are integrated into different investment approaches.
Buzzwords abound, but the reality is that this is pretty simple and that the market is standardising around clear, distinct meanings.
The development of the EU taxonomy on sustainability is a good example of that trend.
How to keep up and why to start now
At the EU level, positive steps have already been taken to set out a framework for deciding what can and what cannot be labelled as ‘green’.
