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New
Decoding Responsible Investing and ESG
Sustainable Finance
,
Institutional Investing
October 29, 2019
Alice Evans
Director and Co-Head of the Responsible Investment (RI) Team, BMO Global Asset Management (EMEA)
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Sustainable Finance,
Institutional Investing
October 29, 2019
We are experiencing a sea change in perceptions of responsible investing, with growing interest from mainstream investors, and an expanding investment opportunity set. Nevertheless, a number of headwinds to more rapid progress remain, including overlapping buzzwords, misperceptions and a lack of cohesion. To demystify this increasingly relevant space, Alice Evans, Director, Co-Head, Responsible Investment, BMO Global Asset Management, delivers a unified framework that can serve as a keystone for understanding the RI universe.
The Six Buzzwords You Need to Know
For investors looking to improve their understanding of responsible investing, it can be helpful to map out the architecture of this niche. For example, what are ESG factors? How do they relate to sustainability? Laying out clear definitions for a few essential terms, and knowing how they intersect, can help bring a much needed sense of clarity to the discussion. To that end, see the four categories we have bolded below:
Responsible investing (RI) is the broad umbrella in the space. All other elements fall under this blanket term, in our view. Meanwhile, Environment, Social and Governance (ESG) factors are a framework breaking down the concept of sustainability into key environmental, social and governance issues, such as the following.
| Environmental | Social | Governance |
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A subset of RI, sustainable investing focuses investment on companies that are making a positive contribution in addressing social and environment challenges. Notice the difference – while it is usual to refer to the sustainable fund as an investment vehicle, ESG factors simply provide a language for articulating the fund’s priorities – they are not themselves typically an investment.
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Ethical investing, on the other hand,can be considered the counterweight to sustainable investing, in the sense that it uses negative screeners, or exclusions, to eschew firms with an adverse social or environmental impact, and typically avoiding “sin” sectors. The distinction between an inclusive or exclusive approach is an important one for asset managers to consider when establishing their investment objectives.
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Finally two strategies that can be applied across any ‘sustainable’, ‘ethical’ or indeed completely mainstream portfolio. ESG integration - this simply refers to the inclusion of an understanding of the ESG issues affecting a company within the investment analysis, to ensure those issues are fully reflected in the valuation. Engagement – this means entering into a dialogue with companies after investment, to support and encourage positive change in management of key ESG issues.
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Alice Evans
Director and Co-Head of the Responsible Investment (RI) Team, BMO Global Asset Management (EMEA)
VIEW FULL PROFILE
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