The U.S. Securities and Exchange Commission (SEC) recently fined Goldman Sachs Asset Management $4 million for failing to align a fund with an Environmental, Social, and Governance (ESG) investing strategy with the policies and procedures marketed to clients for this fund, along with a similar issue for two mutual funds. This penalty raises an important question: how should asset managers and fund advisers communicate their ESG strategies?
An industry-wide movement to better define these strategies is underway by defining categories for ESG investing strategies. The reason is whether asset managers recommend investing in companies either seeking ESG opportunity or minimizing ESG risks, each strategic investment decision may warrant different disclosure requirements for their clients.
Communicating these investment strategies to clients is important to ensure alignment between client expectations and investment outcomes.
Here are the main categories of ESG investing strategies, according to the Global Sustainable Investing Alliance:
1. ESG Integration
“The systematic and explicit inclusion by investment managers of environmental, social and governance factors into financial analysis.”
- Considerations: Requires access to ESG data and a clear and consistent approach to integration. Given the vast differences in ESG scoring and rating methodologies, communicate the discrepancies in available data when using this approach.
- Example: Using a proprietary ESG risk scoring model, a fund includes weighted shares for top performing companies for a wide-range of environmental, social, and governance criteria as well as financial performance across a broad base.
2. Corporate engagement and shareholder action
“Employing shareholder power to influence corporate behavior, including through direct corporate engagement (i.e., communicating with senior management and/or boards of companies), filing or co-filing shareholder proposals, and proxy voting that is guided by comprehensive ESG guidelines.”
- Considerations: It’s important to report how shareholder engagement and voting address ESG risks and clearly define the goals of engagement.
- Example: A group of investors passes a resolution to appoint new board directors who demonstrate expertise in climate change action for an oil and gas company.
3. Norms-based screening
“Screening of investments against minimum standards of business or issuer practice based on international norms such as those issued by the UN, ILO, OECD and NGOs (e.g., Transparency International).”
- Considerations: Transparency regarding economic risk and potential impacts to financial performance for heavily screened funds is important.
- Example: A pension fund requires investments to meet ISO 45001 health and safety standards.
4. Exclusionary screening
“The exclusion from a fund or portfolio of certain sectors, companies, countries or other issuers based on activities considered not investable. Exclusion criteria (based on norms and values) can refer, for example, to product categories (e.g., weapons, tobacco), company practices (e.g., animal testing, violation of human rights, corruption) or controversies.”
- Considerations: As with norms-based screening, transparency regarding economic risk and potential impacts to financial performance for heavily screened funds is important.
- Example: A broad-based ETF excludes weapons, tobacco, and alcohol to appeal to religious investors.
5. Positive screening/best-in-class
“Investment in sectors, companies or projects selected for positive ESG performance relative to industry peers, and that achieve a rating above a defined threshold.”
- Considerations: Again, transparency regarding economic risk and potential impacts to financial performance for heavily screened funds is important.
- Example: A portfolio manager selects investee companies for best-in-class performance across all industries for gender pay parity.
6. Thematic investing
Investing in themes or assets specifically contributing to sustainable solutions - environmental and social - (e.g., sustainable agriculture, green buildings, lower carbon tilted portfolio, gender equity, diversity).
- Considerations: Asset managers should communicate whether these investments apply a lens to a broad economic base.
- Example: An ETF includes all publicly listed renewable energy companies in a region.
7. Impact investing
“Investing to achieve positive, social and environmental impacts - requires measuring and reporting against these impacts, demonstrating the intentionality of investor and underlying asset/investee, and demonstrating the investor contribution.”
- Considerations: Strong reporting with external assurance on targets and metrics from investee companies is advised for demonstrating impacts.
Example: A pension fund creates a lending program to invest in affordable housing development.
Additional investment categories exist within specific regional regulatory contexts. In Europe, for instance, ESG asset managers and fund advisers have the option to align investments with the EU Taxonomy, show a percentage of sustainable funds, or report on Principle Adverse Impacts as they’re defined in Europe’s Sustainable Finance Disclosure Regulation (SFDR).
Of course, asset managers and fund advisers can apply multiple strategies in tandem. This is why the information fund managers need to disclose to their investors can vary significantly depending on the underlying strategy. It’s important to make ESG investment strategies as transparent as possible for:
- making legitimate claims about ESG investment products
- aligning better with clients’ investment goals
- building awareness of the fact that ESG investing is not a monolith
YourStake’s platform is filled with ways to personalize a mixture of investing strategies to create highly custom portfolios using rich ESG data. We include filters for thematic ESG issues–our values screens–as well as data on benchmarking, shareholder engagement, and a range of financial performance metrics.
Our values screens include both exclusionary categories such as “animal exploitation” or inclusionary categories such as “women on boards.” You can dig deeper to identify specific ESG details at the company level, such as Scope 3 emissions. Finally, our platform makes it easy to drill into the original data sources for the ESG information, which you can then include in a variety of report formats.
Made with the awareness that Advisors need high-quality data, a range of financial and thematic screens, and a means to quickly and easily report these details, our platform is a highly adaptable tool for applying a wide range of ESG investing strategies.