Sustainable Investment Strategies and a New Type of Responsibility for Asset Managers

The spectrum of sustainable investment strategies ranges from the use of straightforward exclusion or inclusion criteria (e.g., based on the business activities of companies) to Impact Investing (in addition to a normal market return, a positive effect on the environment or society is also desired), to what is known as ESG Integration (ESG risks and opportunities are taken into account along with traditional risk and return expectations).

The list below is not exhaustive, but does provide a broad overview of the range of sustainable investment strategies available to asset managers:

Negative screening avoids investment in companies that have negative impacts on society and the environment, or that demonstrate poor corporate governance.

Asset managers take into account the exclusion criteria that asset owners have specified. These criteria can be based on specific ESG topics such as climate change, human rights violations, or corruption; likewise, they may be based on ESG factors such as a company’s ESG rating or its involvement in controversial sectors such as tobacco or firearms. Companies that meet the criteria are excluded from the investment portfolio.

Negative Screening harmonizes the values of the asset owner with their investments, but it can also be used as a risk-management tool.

Positive screening makes it possible to invest in companies that have a positive influence on society and the environment, and that demonstrate solid corporate governance.

The asset manager selects the investment targets based on the predefined inclusion criteria set by the asset owner. These criteria can be based on specific ESG topics such as renewable energies, social justice, or diversity within corporate leadership; likewise, it may be based on general ESG factors such as a company’s ESG rating or its commitment to sustainability.  Companies that meet the criteria are included in the investment portfolio.

Positive Screening harmonizes the values of the investor with their investments, but can also be used to identify companies that could show better long-term performance due to their focus on sustainability.

In contrast to the strategies mentioned above, which focus on identifying and avoiding companies with negative ESG risks, Impact Investing aims to invest in companies and projects that have a measurable positive influence on society and the environment. This can include, for example, reductions in CO₂ emissions, fostering gender equality, or improving access to clean drinking water.

As a goal of their investments, asset owners have a range of investment instruments available to them, such as investment funds, ETFs, and direct investments.

ESG Integration is an especially popular sustainable investment strategy among asset owners who believe that sustainable companies are more likely to be successful long term, and will generate higher returns. This strategy clearly differs from Impact Investing.

Instead of defining specific requirements, as with Negative and Positive Screening, ESG considerations are a key component of the traditional analysis and investment process. ESG criteria are regarded as an additional return factor. The investment decision is accordingly based on a quantitative and qualitative analysis of ESG data. 

The investment decisions made by asset managers must reflect the values, risk profile, and sustainability objectives of the asset owner.

Depending on the investment strategy selected, there will also be differences in the requisite analyses, the type of reporting, and the associated data requirements. Especially with regard to reporting, it is important that asset managers provide transparency to the asset owner regarding the selected investment strategy.

Transparency is everything. Particularly in the case of complex sustainable investment strategies, asset managers must provide and explain detailed qualitative and quantitative information. This also helps in refuting any allegations of greenwashing.

Responsible asset management requires transparent reporting so as to provide clients with a clear picture of not only the ESG objectives and the sustainable investment strategy, but the sustainability risks that have actually been reduced and any positive effects that have achieved.

A responsible asset owner can contribute greatly in this regard. He or she can support the implementation of a sustainable investment strategy by requesting detailed information and corresponding key figures, and asking specific questions about the sustainability of a portfolio or investment product.