Terminologies may differ – There are many approaches under the sustainable investing umbrella. Examples include environmental, social, and governance (ESG) integrated; ESG focused (otherwise known as sustainable); and impact investing. There isn’t currently a uniform definition of these terms, and different asset managers may define them differently.

Environmental, social, and governance – ESG criteria are one way to evaluate how a company behaves. For example, environmental standards can measure how a company treats natural resources; social standards can evaluate how a company manages relationships with its community; and governance criteria can focus on issues such as diversity on corporate boards (FIGURE 1).

Not about giving up returns – Some historical data indicate that there hasn’t been a performance trade-off with ESG-focused funds. In fact, sustainable funds “outpaced conventional peers” in 4 of the last 5 years.¹

ESG factors may provide greater insight – ESG research is information (in the form of data and ratings) about ESG issues that may affect investment decisions. Investors can help hedge their portfolios against risks stemming from ESG factors such as climate disasters, while also seeking to capitalize on opportunities such as the transition to renewable energy.

ESG in action – The emphasis placed on ESG criteria vary across funds. Some portfolio managers may view ESG factors as one consideration among many as they make their investment decisions. Other portfolio managers may demonstrate a higher level of commitment to ESG investing by making it a key consideration in their investment decisions. 

Not all data providers are the same – ESG data can vary widely between third-party data providers and may not be forward looking. Proprietary quantitative and qualitative ESG research performed by active managers may provide a more comprehensive analysis than third-party data providers.

Not just for Millennials – Contrary to popular opinion, many investors across all ages feel positively about a sustainable portfolio: 44% of people age 71+ as well as 60% of people age 18-37 rated it favorably.²

Sustainable investing can be smart investing – Many ESG factors can have a financially material impact on valuations. Active managers are eager for clear and consistent information to inform investment decisions. Using ESG research is one way to better manage risks and opportunities.

Something to talk about – A study found the top five concerns for institutional investors are climate change/carbon, conflict risk, board issues, sustainable natural resources/agriculture, and tobacco.³ Your list may be quite different. 

ESG may be here to stay – A recent study found that 88% of US fund managers have made ESG a bigger priority over the past year.⁴