ESG and Ethical Investing

ESG and low carbon investing - putting theory into practice

Practical papers for integrating ethical and low carbon strategies

ESG and low carbon strategies appear to be slowly gaining market share. Looking at downloads of ESG and low carbon white papers by institutional investors on the Savvy Investor website, engagement is very high.

In recent months, some excellent papers have been published, taking a very practical approach to implementing and integrating ESG and low carbon strategies. Here's our list of the best recent papers:


Exploring ESG: A Practitioner's Perspective (BlackRock, 2016)
This paper by BlackRock provides important insights into ESG matters from the viewpoint of a fiduciary investor acting on asset owners' behalf. The authors define three key areas in which fund managers integrate ESG factors. They also describe the current ESG disclosure initiatives landscape across regulatory bodies and organizations. They conclude with recommendations for policymakers.

Scientific Beta Low Carbon Multi-Beta Multi-Strategy Indices (EDHEC, Aug 2016)
The authors of this 50-page paper introduce ERI Scientific Beta's low carbon indices. The indices rely on the principle of reducing an index's carbon footprint by using a mild exclusion of high carbon stocks, while maintaining exposure to rewarded risk factors and an appropriate level of diversification. The existing argument for low carbon investments, in contrast, relies on the profitability of low carbon stocks or the existence of a low carbon premium, a concept this paper brings into question.

ESG Integration into the Investment Process (CalPERS, 2016)
This presentation by CalPERS gives an outline of how ESG factors can be integrated into the investment process. It touches on investment beliefs, public markets, private markets and portfolio tilting.

The Equity Investor's Guide to a Low Carbon Economy, 2015-25 (Goldman Sachs)
This 50-page report from Goldman Sachs examines the low carbon world that we are moving towards, with a focus on low carbon technologies and low carbon regulation.

ESG - Road Blocks or the Road to Integration? (FTSE Russell, 2016)
There is a growing trend, particularly amongst larger asset owners, to consider ESG factors within core investment processes. The level of sophistication varies between markets and institutions, but the momentum is clear. This seven-page study explores some of the perceived obstacles to applying an ESG framework to the stock selection process, and sets out practical ways of achieving a successful integration. FTSE Russell is a leader in driving the global alignment of standards, drawing a framework for each “ESG theme” on which companies are evaluated. The FTSE Russell ESG framework places an emphasis on identifying material themes, in order to tailor the process to each company that is appraised.

ESG in Private Equity: from buzzwords to tangible implementation (PGGM)
Many GPs and LPs have ESG factors on the agenda and yet in the world of private equity, its meaning is unclear. In this chapter, ESG factors are brought beyond the buzzwords of theory and examples are provided of how ESG risks can be measured, managed, and mitigated in practice. It considers, in particular, the moral ethics of investing in weapons and tobacco. It also examines how ESG can not only help reduce risk but also create value by prompting the development of new products or reducing energy dependency.

UK Pension Fund Stewardship Survey 2016 (PLSA)
The PLSA's annual stewardship survey examines how UK pension funds are exercising their responsibility to be good stewards of many billions of pounds of funds under management. The survey considers stewardship principles, shareholder engagement and voting, class actions, asset manager selection and review, fund manager capacity and a variety of other topics within the umbrella of ESG and good stewardship.

Fixed Income Investments in a Carbon-Conscious World (Lazard, Aug 2016)
In the last few years, institutional investors have become increasingly focused on integrating ESG factors (environmental, social, and governance) into their investment portfolios. This growing awareness has led to efforts to assess companies (even countries) within an ESG framework which encompasses both quantitative and qualitative attributes. This paper by Lazard Asset Management examines the rise of green bonds for fixed income investors. The authors provide an introduction to green bonds. They define these securities, explain the underlying principles, and outline the market and issuance. These bonds, in their view, represent an attractive opportunity as investors and issuers seek to reduce the carbon footprint of their portfolio activities.

Climate Change: Impact on long-term portfolio returns (Frontier Advisors, 2016)
In this 12-page paper, the authors take a preliminary view of what the scale of climate change impacts for institutional investors might be over the medium to long term. They discuss some of the (possible) implications for trustees and members.

The impact of ethical investing on returns and volatility (Newton IM, 2016)
Faith-based investors, charities and institutions are rapidly adopting more ethical investment approaches to their strategies. It goes without saying: ethical investing is now a mainstream issue. There however have been some studies that question the idea of imposing such constraints on an investment portfolio. This paper, by Drs Lucius Li and Chendi Zhang, analyses the impacts of commonly applied ethical frameworks. The authors seek to provide an independent and academic starting point for interested investors.

Fossil Fuels: Exploring the stranded assets debate (2015)
The authors of this paper categorize fossil fuel investor responses into risk adjustment, divestment, hedging, and engagement to help institutional investors assess issues and to develop a framework for strategic responses that are proportionate and pragmatic.

Risks and Opportunities From Climate Change: Playbook for the Truly Long-Term Investor (Cambridge Assoc, 2015)
How should fiduciaries, pension funds and managers of globally diversified funds approach the subject of climate risk? How should this question impact upon portfolio management? Climate risk is multi-layered and there are many issues for the truly long-term investor to consider. Some of these are defensive (how to preserve value) and others are offensive (what opportunities does climate change present?) This 40-page paper from Cambridge Associates explores the risks and opportunities associated with the changing climate that prudent investors should consider for long-term success.