Considerations on ESG Investment Implementation
Although interest in investing according to environmental, social, and corporate governance (ESG) standards is widespread, investment managers face a number of basic considerations with their portfolio choices. In this article, I give a high-level overview of these considerations within the context of the investor motivation: ESG values, ESG value, or both. These considerations include whether investors should exclude certain firms or use a positive tilt; how they could integrate ESG into an investment approach; the role of third-party ESG ratings; how they should measure and report their portfolios' ESG qualities; and what evidence shows about whether integrating ESG principles or engaging firm management on ESG issues affects portfolio financial performance.
- ESG investing approaches can differ greatly based on whether the motivation is based on ESG values, ESG value, or both.
- Using an ESG exclusionary approach can result in very different portfolio characteristics from using an ESG integration approach.
- Portfolio manager disclosures regarding portfolio ESG qualities depend on whether their clientele want information concerning the portfolio's ESG values or ESG value.
- Given more than 3,000 studies on the relation between ESG/SRI and portfolio returns, there is still no consensus answer, probably due to the aggregation of different types of firms and portfolios (that is, ESG values versus ESG value). However, a majority of the studies on individual firms find a positive relation.
Center Affiliation: Center for Financial Innovation and Stability
JEL classification: G11, G19
Key words: corporate social responsibility, ESG investing, ESG values, ESG value, investment portfolio, sustainably responsible investing
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