Investments, Environmental, Social, Governance (ESG)
A CRITICAL factor in the financial performance of investments is the investor’s ability to identify drivers of the expected risk and return of investments. The Risk and return of investments are affected by environmental, social and governance (ESG) issues which are difficult to measure in monetary terms. Financial analysts and asset managers are expected to be familiar with the financial factors that drive the value of an investment. ESG issues are often interlinked, and it can be challenging to classify an ESG issue as solely an environmental, social, or governance issue.
The most commonly used methods for bringing ESG considerations into investors’ decision making process are:
1. Exclusionary screening/ negative screening - This is the process of excluding companies that do not comply with specific, pre-set social or environmental criteria, when making an investment decision.
2. Best-in-class selection - This approach involves the selection or weighting of the best performing or most improved companies or assets as identified by the ESG analysis.
3. Thematic investing - This is the activity of investing in themes that are linked to the development of sustainability. Sustainability themed investments inherently contribute to addressing social and/or environmental challenges such as climate change, eco-efficiency and health.
4. Active ownership - Active ownership is done through the voting of shares and other activities that the organisation will be planning on doing, and engagement with companies on ESG matters. This is a long-term process, seeking to influence behaviour or increase disclosure.
5. Impact investing - Impact Investments are investments made into companies, organisations and funds by investors with the intention to generate social and environmental impact alongside a financial return.
For more details on the Environmental, Social and Governance analysis, look out for next week’s article!
Upcoming AGMs and EGMs ◆ Willdale Limited, the Boardroom, Willdale Administration Block. Teneriffe Factory, 19.5km peg Lomagundi Road, Mount Hampden, 7 March 2019,1100 hours.