A Goals-Based Approach to ESG Investing

Abstract

Discussions of ESG (environmental, social and governance) investing tend to be complex and vague at the same time, in an attempt to serve the potentially conflicting interests of activists, investment managers and consultants, stakeholders and asset owners. Impact (“doing good”) is difficult to achieve with most investment choices, therefore complicating the most common rationale for ESG. Investment service providers and activists, and groups like the UN PRI know this, but usually don’t say it loudly.

Asset owners need to be realistic about what they can achieve and line that up with what, if anything, they want to achieve with ESG, such as the following. Alignment of portfolios with values, without expecting impact, is achievable for those who want it. Active investment managers should be expected to use (integrate) ESG data in their investment processes—with a risk/return goal, separate from impact or values-based investing. Large investors, or like-minded groups, may be able to influence others with their investment choices (like divestment), especially by using them to stigmatize what they view as bad actors. Asset owners can vote proxies in line with their interests and values. Investors can leverage their consumer power, such as by working with more emerging/diverse managers -- which some argue have an alpha advantage. Direct impact can be achieved, largely with targeted private market investments.

Keywords: ESG, investments, asset allocation, sustainable investing, SRI, divestment, active management, shareholder engagement

JEL Classification: G11, G10