​Investment- Approaches to Responsible  investing 
ESG investing is part of a range of practices collectively referred to as responsible investment or sustainable investment. Although ESG investing is concerned with how ESG concerns can effect the long-term return of assets and securities, alternative responsible investment techniques can also take into account non-financial value creation and reflect stakeholder values in an investment strategy.

Responsible investment may mix financial with non-financial outcomes and complements typical financial research and portfolio creation strategies.

The table below illustrates some of the conceptual differences between these approaches and how they range from strictly ‘finance-only’ investments, with no consideration of responsible investing factors, to the other end of the spectrum, where the investor may be prepared to accept returns lower than comparable investments in exchange for the higher positive impact that the projects and companies in the portfolio deliver.

As investors shift towards the right side of the spectrum, they are increasingly interested in aligning their capital with responsible investment possibilities in order to gain associated financial returns and/or to have a good influence by financing solutions to societal difficulties.
The Spectrum of Responsible and Financial Investing



Defining ESG Investing
ESG investing is a strategy to managing assets in which investors deliberately consider environmental, social, and governance (ESG) factors in their investment decisions with the long-term return of an investment portfolio in mind. In other words, ESG investing tries to appropriately identify, evaluate, and price social, environmental, governance, and economic risks and opportunities.

ENVIRONMENTAL FACTORS
Environmental elements are those relevant to the natural world. These include the use of, and interaction with, renewable and non-renewable resources (e.g., water, minerals, ecosystems, and biodiversity).

Social influences affect the lives of humans. The category encompasses the management of human capital, non-human animals, local communities, and clientele.   

GOVERNANCE FACTORS
Governance elements are those that involve issues connected to countries and/or jurisdictions or are normal practice in an industry as well as the interests of broader stakeholder groups.    

The Scope of ESG Investing
There is currently no common criteria for allocating E, S, and/or G to issues, and they may overlap with one another. Investors interested in investigating E, S, and/or G factors are typically concerned about the associated challenges, which the following table presents a few examples of for each factor

Corporate Social Responsibility
ESG investing and corporate social sustainability are closely intertwined. Corporate social sustainability is an approach seeking to produce long-term stakeholder value through the implementation of a company plan that emphasizes on the ethical, social, environmental, cultural, and economic components of doing business.

ESG investing understands that the development of long-term sustainable returns is dependent on stable, well-functioning, and well-governed social, environmental, and economic systems, which is often dubbed the triple bottom line (TBL). The TBL accounting theory widens the traditional accounting framework, which has previously primarily centered on profit, to include two new performance areas: the social and the environmental impact of a company’s operations

Responsible Investment Approaches
ESG is an important component of responsible investing. We will now discuss approaches to responsible investment and their characteristics. The following slides illustrate approaches that all integrate ESG factors.

Socially Responsible Investment (SRI) is a method that applies social and environmental issues to evaluate enterprises. Investors applying SRI generally grade firms using a defined set of criteria in conjunction with sector-specific weightings. A hurdle level (minimum ESG score for companies being evaluated) is established for qualification within the investment universe based on employing either the complete universe or sector-by-sector analysis. This information serves as the initial filter to produce a list of SRI-qualified companies.  

SRI rating can also be used in connection with best-in-class investments, thematic funds, high-conviction funds, or quantitative investment methodologies.      

The Best-in-Class Investment method entails selecting only those companies that overcome a set rating hurdle, developed using ESG criteria within each sector or industry.  

Typically, organizations are assessed on a variety of parameters that are weighted according to the respective sector.  

The portfolio is then created from the list of qualified companies. 

The Sustainable Investment strategy selects assets that contribute in some way to a sustainable economy — that is, an asset that minimises natural and social resource depletion.  

It is a broad phrase, with a broad variety of interpretations that may be utilized for the assessment of common ESG issues.  

It may incorporate best-in-class and/or ESG integration, which evaluates how ESG problems effect an investment’s risk and return profile.  

It is further used to characterize companies having good influence or companies that will benefit from sustainable macro-trends.  

The word ‘sustainable investment’ can also be used to imply a strategy that screens out activities considered contradictory to long-term environmental and social sustainability, such as coal mining or prospecting for oil in the Arctic regions.  

The Thematic Investment strategy entails selecting companies that fall under a sustainability-related theme, such as clean-tech, sustainable agriculture, healthcare, or climate change mitigation. Thematic funds identify companies throughout several sectors that are connected to the theme.  

A smart city fund, for example, might invest in companies offering activities or products connected to electric vehicles, public transportation, smart grid technology, renewable energy, and/or green buildings. 

The Green Investment method entails allocating funds to assets that minimize the following:

Climate change 

Biodiversity loss 

Resource inefficiency  

Other environmental concerns (e.g., low carbon power generation and cars, smart grids, energy efficiency, pollution control, recycling, and waste management)  

Green investment can thus be considered a large sub-category of theme investing (see previous slide) and/or impact investing (see next slide). Green bonds, a sort of fixed-income instrument that is particularly intended to raise money for climate and environmental projects, are extensively utilized in green investing.  

The Social Investment method directs funds to assets that address social concerns. These can be goods that address the bottom of the pyramid (BOP). BOP refers to the lowest two-thirds of the economic human pyramid, a group of more than four billion people living in poverty.  

More broadly, BOP refers to a market-based strategy of economic development that tries to simultaneously reduce poverty while generating growth and profitability for enterprises servicing these regions. The following are some examples: 

Microfinance and microinsurance 
Access to basic telecommunication 
Access to improved nutrition and health care 
Access to clean energy 


In effect Investing, investments are undertaken with the specific goal of generating positive, measurable social and/or environmental effect alongside a financial return (which differentiates it from venture philanthropy). These are frequently connected with direct investments, such as in private debt, private equity, and real estate. But in recent years, impact investing has gradually become more common in the public markets.  

Impact investments provide capital to address the world’s most pressing concerns by investing in projects and companies that may do the following: 

Offer access to basic services, including housing, healthcare, and education 

Promote availability of low-carbon energy 

Support minority owned businesses 

Conserve natural resources 

Measurement and tracking of agreed-on impact is at the heart of the investment proposition. Impact investors have various financial return expectations. Some purposely accept lower returns than comparable investments in keeping with their strategic objectives. Others pursue market-competitive and market-beating returns, often compelled by fiduciary duty. 

An ethical (also known as value-driven) and Faith-Based Investment approach refers to investing in line with certain principles, often using negative screening to avoid investing in companies whose products and services are deemed morally objectionable by the investor or certain religions, international declarations, conventions, and voluntary agreements. Typical exclusions include tobacco, alcohol, pornography, weapons, nuclear power, and substantial infringement of agreements, such as the Universal Declaration of Human Rights or the International Labour Organisation’s Declaration on Fundamental Principles and Rights at Work.  

Shareholder engagement represents active ownership by investors in which the investor strives to influence a company’s actions on concerns of ESG, either through communication or votes at a shareholder meeting. It is considered as complementary to the other techniques since it pushes firms to operate more responsibly.

All types of ethical investment, except for engagement, are ultimately tied to portfolio construction – that is, the securities a fund holds. The investing approaches mentioned above highlight the wide variety of different types of ethical investment.