ESG investors are increasingly aware of the importance of environmental, social and governance (ESG) issues when it comes to their portfolios. They seek to ensure that the companies they finance are responsible stewards of the environment, good corporate citizens and are led by responsible managers. This is why ESG scores have become an important measure of sustainability for investments. A good framework for thinking about impact are the United Nations Sustainable Development Goals (SDGs), the 17 objectives that the UN identified as necessary for a sustainable future.
One form of active participation in ESG investments is power resolutions and proxy voting, an aspect of the active ownership strategy for sustainable investment. This allows long-term passive investors to hedge climate risk without sacrificing profitability. The key to the new generation of sustainable investments is that it focuses only on “important” ESG issues affecting the valuation of companies. The investment community is recognizing and quantifying environmental and social considerations and the impacts of corporate governance on the investment process.
Asset owners, such as pension funds, are increasingly demanding sustainable investment strategies from their asset managers. A fund's portfolio can also include securities that do not fit any of the ESG categories, especially if it is a fund that believes that other investment methodologies are consistent with the fund's investment objectives. The biggest obstacle to investment is that most corporate sustainability reports are not aimed at investors but at other stakeholders, such as NGOs, and are therefore of little use to investors. However, with more awareness and understanding of ESG investments, this obstacle can be overcome.
