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Understanding sustainable investing approaches

Module 3. Understanding sustainable investing approaches - 10min

Sustainable investing can be broken down into six main approaches which are either mainstream or specialised.

Mainstream approaches:

Exclusion: Avoiding securities of companies or countries based on ethical concerns (e.g., products or services involving alcohol, tobacco, or gambling) and/or standards and norms (e.g., the United Nations Global Compact).

ESG integration: The explicit inclusion of ESG risks and opportunities into traditional financial analysis. The Business for Social Responsibility (BSR) defines ESG integration as follows: “ESG integration refers to the idea that all types of investors should examine companies’ sustainability practices and performance because they can have a material impact on the financial performance of companies”

Stewardship: Also referred to as shareholder engagement, shareholder activism, or shareholder dialogue. These different names refer to the act of entering into a dialogue with companies about ESG issues to promote more sustainable practices and to exercise shareholders’ rights accordingly.

These three mainstream approaches are often used together for example an investor could remove issuers that are not compliant with their Responsible Business Conduct Policy, the investment team could then integrate material ESG factors into its fundamental analysis and engage with key holdings on the relevant ESG issues.

Specialised approaches:

Best in class: Preferring companies that offer both attractive investment opportunities and demonstrate superior performance on relevant ESG issues relative to other companies in their industries. This approach is also called positive screening.

Thematic investing: Investing in emerging sustainability-related trends, such as social, industrial, and demographic trends. Examples of environmental themes include renewable energy, energy efficiency, water, and waste technology. On the social side, investments can focus on sectors such as global health, inclusive growth, education, and social infrastructure.

Impact investing: According to the Global Impact Investing Network, a not-for-profit organization dedicated to increasing the scale and effectiveness of impact investing, impact investing is defined as follows: investments made into companies, organizations, and funds with the intention to generate measurable social and environmental impact alongside a financial return.”  Dr. Harry Hummels defines impact investing as follows: “All investments can have a positive impact on society and the environment, but what distinguishes impact investments is their disclosed intention to make a positive impact and the fact that their impact is measured.”


How would you define the following approach  “I understand you want to invest in this promising oil and gas company, but have they set targets to reduce their carbon emissions? We have to take that into account before investing. I anticipate it will negatively affect the investment case.”

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