Recent years have seen a surge of investor interest in integrating environmental, social and governance (ESG) information into financial analysis and investment decisionmaking.
Signs of this trend include continued growth in the volume of managed assets
that incorporate ESG research, increasingly sophisticated investor tools, more ESG information providers, more ESG information gathering frameworks, more indices incorporating ESG data, and the use of ESG factors across asset classes, including fixed income and alternatives. According to data collected by the Global Sustainable Investment Alliance, ESG investment strategies, broadly defined, currently account for USD 22.9tn in managed assets worldwide, up from USD 13.3tn in 2012.
The report outlines the “typology” of ESG investing with “six prevailing types” of approaches.
Within this dimension, the two key differentiators for distinguishing approaches to ESG integration are:
a) the degree to which functions and responsibilities related to ESG integration
are centralized in an organization, and
b) the extent to which a firm or investment team has processes in place to
The report also examines the scope of research and the difference between “top-down” (the development and execution of an investment thesis based on a general view (as opposed to a view derived from fundamental analysis) of how ESG factors may create investment risks and opportunities) and “bottom-up” (the integration of ESG factors into security-specific fundamental analysis in the context of security valuation and selection) applications.