Getting to Know ESG
ESG Investing – A Practical Guide
Environmental, Social, and Governance (or ESG) investing is gaining popularity amongst many different types of investors. It’s easy to understand broadly the benefits of socially-responsible investing, but there’s actually a lot behind it. One thing is for certain, the opportunity to do well and do good within a portfolio is an attractive concept to many.
Learn more about ESG investing with our practical guide below.
What is ESG?
Environmental
Environmental reflect, in short, how a company affects nature, and vice versa.
This may include factors such as climate change, carbon emissions, water usage, waste, or renewable energy.
Social
Social examines a company’s relationship with its stakeholders.
This may include reviews of human rights, employee relations, working conditions, and use of child labor among customers, suppliers, employees and their community or region.
Governance
Governance focuses on corporate leadership, policies and company structure.
This may include board and management diversity and structures, executive pay, auditing and compliance policies, corruption prevention, or transparency.
Let’s Clear Up Any Confusion
There are a lot of buzz terms when it comes to responsible investing. Here’s what they mean:
Exclusionary/Negative Screening
Applying norms-based or values-based (SRI) screens to exclude companies whose business activities do not meet client-specific values or guidelines or that violate “universal norms.”
ESG Integration
Systematically integrating extra financial variables or issues not captured by traditional financial analysis in an effort to help manage downside risk or capture upside potential.
Positive/Best-in-Class ESG Tilt
Putting greater weight on companies with the strongest ESG characteristics (e.g., ESG ratings or scores, carbon emission intensities).
Thematic Investing
Investing in companies whose business activities are aligned with a specific theme or series of themes (e.g., clean tech) or whose management meets a thematic threshold (e.g., strong board gender diversity).
Impact Investing (see below)
Generating a measurable social and environmental impact alongside a potential financial return. The impact could also be associated with a specific theme or framework (e.g., UN Sustainable Development Goals).
Combined Approaches
Where appropriate, approaches may be combined. For example: A clean tech thematic fund looks to map investments to selected UN Sustainable Development Goals while integrating ESG factors to select companies for inclusion.
Impact Investing Addresses
the Sustainable Development Goals (SDGs)
A collection of 17 global goals set by the United Nations General Assembly.
The Growing Appeal of Impact Investing
Doing good is of interest across gender, geography, and generations according to American Century Investments’ sixth annual impact investing study.
2022 Top Causes that Matter
Other Highlights from this Year’s Study
Since 2018, men’s interest in impact investing is higher than women’s – but women’s interest is growing as well.
Interest in impact investing has generally grown across regions since 2021.
Roughly half of the respondents believe greenwashing has increased.
Many of American Century's investment strategies incorporate the consideration of environmental, social, and/or governance (ESG) factors into their investment processes in addition to traditional financial analysis. However, when doing so, the portfolio managers may not consider ESG factors with respect to every investment decision and, even when such factors are considered, they may conclude that other attributes of an investment outweigh ESG considerations when making decisions for the portfolio. The consideration of ESG factors may limit the investment opportunities available to a portfolio, and the portfolio may perform differently than those that do not incorporate ESG considerations. ESG data used by the portfolio managers often lacks standardization, consistency, and transparency, and for certain companies such data may not be available, complete, or accurate.
Sustainable Development Goals (SDGs) are a collection of 17 global goals set by the United Nations General Assembly. They were developed by a global team of industry and government leaders and adopted by all 193 member states, the SDGs include 17 goals and 169 attendant targets aimed at solving some of the world’s most pressing problems by 2030. The goals include eradicating poverty, providing environmental resources, and achieving gender and income equality.
This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.
Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.
Sustainability
Sustainability focuses on meeting the needs of the present without compromising the ability of future generations to meet their needs. There are many different approaches to Sustainability, with motives varying from positive societal impact, to wanting to achieve competitive financial results, or both. Methods of sustainable investing include active share ownership, integration of ESG factors, thematic investing, impact investing and exclusion among others.