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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.

Key findings:

  1. ESG investing approaches can differ greatly based on whether the motivation is based on ESG values, ESG value, or both.
  2. Using an ESG exclusionary approach can result in very different portfolio characteristics from using an ESG integration approach.
  3. Portfolio manager disclosures regarding portfolio ESG qualities depend on whether their clientele want information concerning the portfolio's ESG values or ESG value.
  4. 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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