ESG integration for investment performance
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The environmental, social and governance (ESG) performance of companies is increasingly in the spotlight in a world where information and opinion travel fast. Shareholders have also recognised ESG as relevant to company performance and risk, prompted at least in part by the value destruction that becomes apparent when shortcomings in these areas are suddenly revealed.

A subset of investors, identifying as 'responsible investors', take a particular interest in these issues. This group has diverse motives and practices. Many seek to express values-based judgements via their investments, but by far the largest proportion seek to use ESG as a way to make superior (more informed) investment decisions - by better understanding assets, strategy, future revenues and growth prospects.

Until recently, most academic and industry research into the investment performance implications of ESG failed to observe an important distinction between values-focused and value-oriented approaches within responsible investment. Both share interests in many themes (like climate change) and tools (like proxy voting), and they are consequently often conflated. But differences between the two have important consequences for investment outcomes:

  • Values-based approaches apply judgement based on ethical considerations, for instance excluding tobacco from portfolios because of its injuriousness to human health. No financial rationale is required, even when it may exist.
  • Value-based approaches view issues through an investment frame, albeit an extended one. In the case of tobacco, this might include analysis of the likelihood that tobacco company profits will be impaired by increased regulation or future liabilities.

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