Investor Corner/The asset classes/Factor Investing and ESG
2.6.5 ESG Investing
ESG investing screens or tilts a portfolio toward companies with better environmental, social and governance scores. Performance evidence relative to conventional investing is mixed; the main benefit tends to be values alignment and potential long-term risk reduction.
What the three letters actually cover
Environmental factors look at a company's impact on the natural environment, such as emissions and resource use. Social factors look at how a company treats its workforce, customers and the wider community. Governance factors look at the quality and integrity of a company's leadership, board structure and internal oversight.
How ESG funds actually build their portfolios
Some ESG funds simply exclude specific industries entirely, such as tobacco or certain fossil fuel producers. Others take a more integrated approach, incorporating ESG scores as one additional input alongside traditional financial analysis when selecting which companies to hold, without necessarily excluding entire industries outright.
What to check before investing based on ESG criteria
ESG methodologies and scoring approaches vary meaningfully between fund providers, so two funds both labelled ESG can differ considerably in what they actually screen for and how strictly. Reading a specific fund's actual ESG methodology, rather than assuming based on the label alone, is worth the effort for anyone specifically motivated by these considerations.
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