Hortense Bioy: ESG, sustainable investing, responsible investing, ethical investing, are terms often used interchangeably to describe this space that is driving a lot of interest at the moment. And all these terms mean different things to different people.
To simplify, at Morningstar we break it down into three approaches based on what investors believe in and want to do:
- Some people just want to exclude stocks that don’t reflect their personal values. So maybe they don’t want to invest in weapons or tobacco companies. So, they screen out these companies. Now investors who choose this approach need to be aware that exclusions purely on the basis of ethical criteria may potentially negatively affect their investment returns.
- For other people, sustainable investing means ESG integration. It is about using environmental, social and governance factors to mitigate risk and potentially generate alpha. So, the objective here is not ethical but financial. And this what an increasing number of asset managers are doing, and this is what is expected to become the new normal. So eventually, every professional investor will integrate sustainability in their investment decisions.
And the third approach is thematic and impact: you want to make a difference. So alongside generating a good financial return, you also want to solve the world’s problems. So for example, you want to tackle climate change, finance energy transition, or improve people’s wellbeing. Impact investing is perhaps the most exciting but also the most challenging part of the sustainable investing space.
So, these are the three main approaches that an ESG-conscious investor can follow. And as you can see, these three approaches can overlap.
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