Guidelines for ESG Portfolio Investment and Management

General Overview

ESG factors are increasingly important for institutional investors when making investment decisions.
Implementation of an ESG strategy can help reduce overall portfolio risk and improve performance.
A growing number of asset managers are offering products that track indexes that focus on companies with good environmental and social practices, also known as sustainable or responsible investing (SRI) funds.
Some investors use negative screening to remove certain types of investments from their portfolios, such as weapons manufacturers or fossil fuel companies.
Many investors believe that incorporating environmental, social, and governance criteria into investment analysis will lead to better decision-making and a more sustainable economy in the long run.

What is ESG Investment?

ESG investments are those that take into account environmental, social, and governance criteria when making investment decisions.
There are many different types of ESG investments, including sustainable or responsible investing (SRI) funds, negative screening, and shareholder activism.
ESG investments can be made in stocks, bonds, mutual funds, exchange-traded funds (ETFs), and private equity.
Institutional investors, such as foundations and pension funds, are increasingly looking to divest from companies that pose a risk to the environment or social welfare.

Why ESG Investment is Important.

Institutional investors are increasingly looking to incorporate ESG factors into their investment decisions.
The negative impact of climate change is being felt not only by society as a whole but also by individual companies’ bottom line.
These costs include increased risk premiums, damage from extreme weather conditions such as storms and flooding, or liability claims arising from accidents such as oil spills.
Although financial markets do not currently value climate-related risks and opportunities directly at securities prices, they will be incorporated indirectly as these physical impacts translate into changes in earnings and cash flows that affect valuations.
It has been estimated that achieving no further global warming would avoid about $20 trillion in damages every year.

Safeguarding of Investments

A growing number of investors are looking to social and environmental issues when making investment decisions. Let’s explore more on the safeguarding processes.

Implementation of an ESG strategy can lead to improved performance, lower costs (due to less waste and better efficiencies), increased market share, and enhanced brand equity.
Institutional investors want their portfolios to reflect the full range of risks that companies face.
A large proportion of funds available for institutional investors are managed by asset management firms.
It has been estimated that achieving no further global warming would avoid about $20 trillion in damages every year.
Many investors believe that incorporating environmental, social, and governance criteria into investment analysis will lead to better decision-making and a more sustainable economy in the long run.
Institutional investors want their portfolios to reflect the full range of risks that companies face.
The global warming potential of methane is 25 times greater than carbon dioxide over 100 years.
Some investors choose not to invest in tobacco or weapons stocks as they see these as unethical investments.
It is estimated that if all institutional funds followed an ESG approach, it would help create up to $1 trillion in market value for companies across seven key industries – oil and gas; mining; metals and minerals; food and beverages; autos; banks; and insurance.

ESG investment management

ESG Management is a method used by companies to create a positive impact on the environment and society while maintaining bottom-line profitability.?
It uses information about – and insights into – environmental concerns and socially responsible business practices to improve operational performance, financial results, and shareholder value.

Responsible ESG investment and Management

Responsible investing is an investment philosophy that supports companies that are committed to ESG management.
It is a proactive, positive approach used by investors to encourage companies to better manage environmental and social challenges.
Responsible investments are conscious of ESG issues. They have three main steps: measuring, mitigating, and reporting.
A regular review of the company will assess how it has dealt with its relationship with stakeholders in the past six months.
This includes analyzing their human rights policies, health & safety records, business ethics policies, community involvement activities, and other impacts on society.

ESG investment strategies

There are five primary strategies involved in ESG investing.
These strategies show various motives that involve the avoidance of ESG and yielding higher returns on investment.
The five identified ESG strategies are:
- Exclusionary screening.
- Positive screening.
- ESG integration.
- Impact investing and,
- Active ownership.

Need to Address Climate Change

The physical impacts of climate change are already being felt by companies, and these are likely to increase in the future as global temperatures continue to rise.
Ecosystems are changing, natural disasters are becoming more common, and extreme weather conditions are causing major disruptions to businesses.
In addition, there is a significant financial risk associated with climate change, as it could lead to a loss in earnings and cash flows for companies.
A growing number of investors are looking at social and environmental issues when making investment decisions.
They realize that implementation of an ESG strategy can lead to improved performance, lower costs (due to less waste and better efficiencies), increased market share, and enhanced brand equity.
Institutional investors are beginning to follow this trend, for both ethical and financial reasons.
They are realizing that focusing on ESG criteria can help them create value in the long run.