While sustainability factors are increasingly understood as essential elements of investment performance, there is no universal strategy for ESG incorporation

Investment strategies vary according to organizational objectives, expectations, and purpose. Likewise, strategies to generate value from ESG can vary substantively.

To determine what approach is most relevant to them, investors and organizations must consider:

  1. Fiduciary and legal responsibilities
  2. The role of values and value in investment beliefs
  3. Practical strategies to implement ESG
  4. Reporting and stakeholder communication


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Fiduciary duty – the legal responsibility of those who manage money on behalf of others to act in the interests of beneficiaries – is a dynamic concept that can vary by locality, though underlying expectations remain the same: fiduciaries must be loyal to their beneficiaries and carry out their duties in a prudent manner. In general, OECD countries with an Anglo-American legal tradition have a standard requiring due care, diligence, and investing as an “ordinary prudent person” would do.

The beliefs, policies and processes that inform investment decisions must be grounded in fiduciary duty, which means it is essential to have appropriate policies in place that account for material factors - including ESG. This point has been reinforced in recent years, with an increase in legal clarifications and regulations referencing ESG worldwide, as well as ESG disclosure requirements for asset owners and investment managers.

Large-scale trends such as climate change, resource scarcity, changing demographics – in addition to a realignment of norms and stakeholder expectations – means it is no longer possible to consider ESG issues as “non-financial” factors. An emerging global consensus now sees ESG as an essential consideration in prudently carring out fiduciary responsibilties.





The goal: generating long-term value for beneficiaries with strategies that take into account organizational values, fiduciary responsibilities, and legal requirements

To meet this goal, it is essential to have in place overarching beliefs that clearly articulate objectives and relevant considerations. These can then be used to guide the formation of robust policies and effective processes.

An investment strategy is predicated by investment beliefs, which reflect long-term views of how capital markets operate and value generated. Articulating beliefs regarding ESG and sustainability serves to broaden perspectives on long-term risks and opportunities and sets the foundation for an effective approach. These ESG policies and frameworks guide an investment strategy that is less reactive and more adaptive to changing market conditions.

ESG should be considered as an essential aspect of generating value throughout the investment processes – not as a standalone element bolted on as an afterthought, but embedded throughout operations. ESG is a foundation for value, and while a clear commitment to ESG must be made at the highest levels of an organization (Trustees/Board), the values that the beliefs and policies embody must be aligned with the objectives and goals of all relevant stakeholders.





Approaches to operationalizing ESG vary depending on organizational objectives and should align with overarching investment policies and strategies

The following section outlines some examples of practical strategies that can be used to operationalize ESG:

+ ESG integration
The integration of ESG information into investment analysis and due diligence in order to better capture risks and opportunities. For example: incorporating ESG data within investment analysis; assessing ESG risks and opportunities at the investment, portfolio, and fund level; using ESG trends to inform models and demand projections.
+ ESG thematic investing
Allocations that target assets where sustainability trends are key investment drivers. For example: climate change & renewable energy; water and resource scarcity & efficiency improvements; Sustainable Development Goals & impact investing.
+ Negative screening
The exclusion of companies, sectors, or industries from the investable universe due to financial and/or ethical considerations. For example: strategies avoiding fossil-fuels (stranded assets); exclusion of "sin" stocks (faith-based investors).
+ Positive screening
Investing in or overweighting assets with superior ESG performance, with the view that these investments will outperform due to stronger management practices. For example: Morgan Stanley review of 10,000 funds concluding investments with strong sustainability performance outperformed financially.
+ Active ownership
The integration of ESG factors into engagement with investees. For example: proxy voting on ESG issues affecting publicly listed companies; focusing management attention on ESG performance to drive value at privately held companies.

+ Asset class specific strategies
Using specific ESG strategies to generate value in different asset classes. For example:
  • Listed equities: e.g. utilizing ESG data in fundamental and/or quantitative analysis; proxy voting and shareholder engagement to improve investees’ ESG performance.
  • Private equity: e.g. improving ESG performance during ownership to generate value at exit.
  • Fixed income: e.g. investing in green bonds; integrating country-level ESG data into sovereign bond analysis.
  • Real assets: e.g. investing in sustainability-themed assets such as wind farms, sustainable timber; investing in property efficiency improvements.
+ Manager selection and monitoring
For those using external firms to manage assets, the processes and metrics that are used to understand manager performance and approaches to ESG.
+ Industry initiatives
Membership and involvement with industry initiatives based on topics and themes most relevant to the organization. For example: PRI, CDP, UNGC, GRI, SASB, INCR, GRESB, CII, GIIN, BVCA, PEGCC, AODP, ICCR, IEN, SIFs, etc.





It is also important to consider which frameworks are used to report on and communicate ESG activities both internally and externally.

Effective communication efforts inform stakeholders how their concerns are being addressed; allows for clear expectations regarding your priorities to investees, investment managers, policymakers, and other stakeholders; and supports the growth of sustainable investing as a whole through greater transparency and opportunities for peer-to-peer benchmarking.

Some questions that need to be considered in reporting and communications include:





There is no "one size fits all" approach to ESG - the factors listed above must be considered with respect to the unique requirements and constraints of each organization

To be successful in generating value from ESG principles, it is essential to:


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