ESG Integration
Responsible investment generally refers to ESG integration. ESG integration is the explicit and systematic inclusion of ESG issues in investment analysis and investment decisions. This integrates all of the material factors in investment analysis and investment decisions, including environmental, social, and governance.
ESG Factors Defined
Environmental: Factors relating to a company’s interactions with the physical environment.
These include (but are not limited to) climate change; greenhouse gas emissions; biodiversity loss; deforestation; air, water or resource depletion or pollution; waste management; change in land use; and ocean acidification.
Social: Factors relating to business practices that have an impact on the rights, well-being and interests of people and communities. These include (but are not limited to) human rights; labour standards in the supply chain; child, slave and bond labour; workplace health and safety.
Governance: Factors relating to the governance of a company. These include (but are not limited to) board structure, composition, size, diversity, skills and independence; executive pay; shareholder rights; stakeholder interactions; transparency; business ethics; bribery and corruption; internal controls; and conflicts of interest.
It means that leading practitioners are:
- analysing financial information and ESG information;
- identifying material financial factors and ESG factors;
- assessing the potential impact of material financial factors and ESG factors on economic, country, sector, and company performance; and
- making investment decisions that include considerations of all material factors, including ESG factors.
Responsible investing is not socially responsible investing which generally refers to process that attempts to avoid investments in certain stocks or industries through negative screening to defined ethical guidelines.
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