A critical factor in the financial performance of investments is the investor’s ability to identify drivers of
the expected risk and return of investments. Financial analysts and portfolio managers are expected to
be familiar with the financial factors that drive the value of an investment. However, issues that are
difficult to measure in monetary terms and that do not form part of traditional financial metrics also
affect the risk and return of investments—at times, decisively. In general, these issues are referred to as
environmental, social, and governance (ESG) issues.
There is no one exhaustive list of ESG issues. ESG issues are often interlinked, and it can be
challenging to classify an ESG issue as only an environmental, social, or governance issue. These
ESG issues can often be measured (e.g., the employee turnover at a company), but it can be
difficult to assign them a monetary value (e.g., the cost of employee turnover at a company).
Although ESG issues frequently receive attention owing to extreme events that cause sharp drops
in the stock prices of relatively large listed companies, they are not confined to equities, extreme
events, or large companies. The ESG issues and related megatrends, such as scarcity of a natural
resource (e.g., drinking water) and changing demographics (e.g., the economic rise of prosustainability
millennials), are relevant to investment risk and return across asset classes.
Most of the discourse on ESG issues has been focused on listed equities, but the practice of
considering ESG issues with respect to other asset classes—most notably, fixed income—is
Investors use six methods for bringing ESG considerations into their decision making: exclusionary
screening, best-in-class selection, thematic investing, active ownership, impact investing, and
ESG integration. These methods are not mutually exclusive and are often used in combinations.
We are a pioneer in ESG investing dating back to the 1990s.