ESG INVESTING

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. Benchmarking, regulations, industry initiatives, and other aspects of sustainability by asset class are all covered. As new opportunities continue to emerge and methodologies develop, the underlying strategic rationale across ESG investing reflects both long-term return potential from sustainable opportunities and risk mitigation.
“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.
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. According to Simpson, “Investing with a sustainable approach aims to deliver better outcomes for all stakeholders over the long run and delivers a better return profile.” Spectrum of ESG Approaches
Asset owners can utilize several different approaches to ESG investing. Broadly, Pictet AM defines these as three types of strategies: ESG integrated, ESG focused and positive impact, based on the European Union’s Sustainable Finance Disclosures Regulation (SFDR).
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. Securities with high sustainability risks might be included in portfolios. However, the objective of this strategy is not to promote a social or environmental outcome. ESG integrated is equivalent to an article 6 SFDR. *
ESG Focused: In a focused approach, investors promote environmental and/or social characteristics. 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. Positive impact is equivalent to an article 8 or 9 SFDR. *