In response to investor concerns about the sustainability of companies’ practices, many have begun integrating ESG factors into their investment decisions. But ESG integration, according to the SEC? What are some common ESG investment strategies?
ESG Integration According to the SEC?
ESG, or “Environmental, Social and Governance,” is a term used to encompass three major categories of interest for investors. These factors can play an important role in investing and business decision-making.
As time goes on, investors and businesses everywhere can use tools such as ESG frameworks and reporting metrics to gauge the impact their investments have on society or protect themselves from potential risks.
Why ESG Integration Matters
The SEC (Securities and Exchange Commission) recognizes that it’s not just about the bottom line—investors need to take corporate social responsibility into account as a part of their decision-making process. Investors who understand companies’ impact on society and the environment will make better investments.
Also, the SEC requires public companies to disclose how they manage environmental, social, and governance (ESG) risks and opportunities in their business. This approach allows investors to understand how companies perform in these areas.
ESG-Focused vs. ESG integrated?
As defined by the SEC, “ESG-Focused Funds” are funds whose investment decisions or engagement with portfolio companies are influenced by one or more environmental, social, and governance factors.
Examples of ESG-Focused Funds include:
- Funds that either include or exclude specific companies,
- Funds focused on engagement with issuers from an environmental, social, and governance perspective
- Funds that focus on environmental, social, and governance issues and any funds that claim to be ESG-focused.
Funds that market themselves as ESG-focused place a significant or primary emphasis on ESG factors. Investing in an ESG integration according to the SEC fund may not involve reviewing ESG issues or using ESG criteria for every decision. An ESG Integration fund does not select or exclude securities primarily based on these factors. A further extension of the ESG-Focused branch, impact funds are directed toward achieving one or more specific ESG objectives.
The Difference between ESG and Investing And Impact Investing
ESG investing and impact investing are often confused. ESG investors look mainly at the company operations and determine whether they have positive Environmental, Social, & Governance (or “triple-bottom line”) metrics.
In contrast, an impact investment seeks to make a more direct and immediate change in sustainability or social welfare through its choice of product or service.
Environmental, social, and governance practices are essential for any impact-investing company. However, the focus is on selling solutions that help achieve sustainability goals globally. For instance, an impact investment might fund research on clean energy.
Summary
ESG integration considers environmental, social, and governance factors when making investment decisions. However, integrating ESG factors into your investment strategy is not an easy task. You must do research and understand what you are investing in. The SEC, however, views this type of integration as crucial for investment success. When investors consider all aspects of an organization’s performance, they create portfolios more likely to be sustainable over time
