CONTENTS
Best practices and current trends in environmental, social, and governance (ESG) investing can be found in this Guide. ESG investing has grown in popularity as asset owners have adopted sustainable goals and responsible investing. It’s an evolving field that continues to see advances across asset classes, data availability, benchmarking and engagement.
Each section offers guidance on the approaches that investors are taking to engage with asset managers, corporates, issuers and wider industry groups in order to promote and expand the use of ESG factors and sustainable approaches within investment portfolios.
The Guide has been updated to reflect the latest developments in sustainability strategies and the top ESG themes for 2024.
DEFINING ESG INVESTING
ESG investing has gained momentum among institutional investors, and it has expanded to deliver a broad range of portfolio objectives across asset classes and strategies. Most asset owners today consider sustainable factors or pursue ESG themes, and many have established sustainability goals. Ongoing dialogue among investors, corporations, sovereigns and regulators is now focused on practical implementation across the investment universe.
Pictet Asset Management (Pictet AM) sponsored this Institutional Investor’s Guide to ESG Investing, which provides current insights and best practices as well as a plan for how to implement, monitor, and manage a sustainable portfolio. It covers sustainability by asset class, data and disclosure issues, benchmarking, regulation, industry initiatives and more.
The underlying strategic rationale for ESG investing reflects both risk mitigation and long-term return potential from sustainable opportunities as new opportunities and methodologies emerge. “Historically, [ESG investing] meant managing risk around environment, social and corporate governance factors in a formalized way,” said Robert Simpson, senior portfolio manager of emerging markets fixed income at Pictet AM. That has progressed to considering investments not just with a risk perspective, but also with considerations of the positive and negative impacts of those investments on the environment and society. “We’ve moved from using ESG as an analytical input to sustainability as an investment output,” he said.
We’ve moved from using ESG as an analytical input to sustainability as an investment output.
Robert Simpson
Senior Portfolio Manager of Emerging Markets Fixed Income, Pictet AM
Aligning investment portfolios with sustainable outcomes also brings them in line with the long-term interests of all stakeholders, including asset owners, their managers and the companies and other entities that they finance. “Investing with a sustainable approach aims to deliver, over the long-run, better outcomes for all stakeholders and delivers a better return profile,” Simpson said.
Two specific themes have moved to the forefront of sustainable investing: clean energy and biodiversity. The transition to clean energy sources, away from fossil fuels, has become a distinct subsector offering a more comprehensive range of investment strategies. Furthermore, investor awareness of the significance of ecosystem health for sustainability has intensified the focus on biodiversity. As investor commitment to ESG awareness and sustainability grows, there are ongoing concerns — and persistent challenges — around greater accountability, regulatory scrutiny, standardized data and corporate disclosure. In order to address accountability, both allocators and asset managers need to have knowledge of ESG investing and a well-informed perspective. Progress on data transparency and standardization is continuing apace, as regulators, data providers and asset managers remain committed to strengthening sustainability factors across investment portfolios.
Global ESG assets are on track to exceed $53 trillion by 2025, representing more than a third of the $140.5 trillion in the world’s projected total AUM, according to Bloomberg Intelligence.
Spectrum of ESG Approaches
Asset owners can utilize several different approaches to ESG investing. Based on the Sustainable Finance Disclosures Regulation (SFDR) of the European Union, Pictet AM broadly defines these as three types of strategies: ESG integrated, ESG focused, and positive impact. ESG Integrated: In an integrated approach, the asset manager takes ESG factors into account in the analysis of a stock or bond to enhance a portfolio’s risk-return profile. Those considerations can have a material impact on the company’s performance and are weighted alongside other financial factors that inform an investment decision. Portfolios may invest in securities with high sustainability risks. However, with this approach, the goal is not to promote an environmental or social outcome. ESG integrated is equivalent to an article 6 SFDR. *
ESG Focused: Investors promote environmental and/or social characteristics in a targeted strategy. Their investments may also be considered sustainable if the companies in which the investments are made follow good governance practices. ESG focused is equivalent to an article 8 SFDR. *
Positive Impact: With an impact strategy, the investments promote economic activities that are environmentally and/or socially sustainable in companies that must also have good governance practices. Investors often employ an impact approach through a thematic strategy that targets a specific challenge, such as clean water or clean energy. An article 8 or 9 SFDR is equivalent to a positive impact. *
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