Responsible investing is widely understood as the integration of environmental, social and governance (ESG) factors into investment processes and decision-making.
ESG factors cover a wide spectrum of issues that traditionally are not part of financial analysis yet may have financial relevance.
This might include how good corporates are with water management, how effective their health and safety policies are in the protection against accidents, how they treat their workers and whether they have a corporate culture that builds trust and fosters innovation.
There are several different categories of sustainable investing. They include impact investing, socially responsible investing (SRI), ESG and value-based investing.
Another school of thought puts ESG under the umbrella term of SRI. Under SRI are ethical investing, ESG investing and impact investing. This is an umbrella term for investments that seek positive returns and long-term impact on society, the environment and the performance of the business. ESG issues are often interlinked and it can be challenging to classify an ESG issue as only an environmental, social, or governance issue.
The growing trend of seeking out both financial and social returns is being driven in part by Millennials who want to align their investments with their personal values. The most commonly used methods for bringing ESG considerations into investors’ decision-making process are:
◆ Exclusionary screening / negative screening
◆ Best-in-class selection
◆ Thematic investing
◆ Active ownership
◆ Impact investing
As a regulator, we encourage all companies to take positive and effective environmental, social and governance actions that are consistent with shareholder interests. Companies that incorporate ESG factors into their long-term strategic planning and communicate that fact to investors, provide a complete picture of their prospective value.
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