Strategies for sustainable investing

Among the most common sustainable financial products are investment funds with sustainability features.

Each 'sustainable' fund considers one or more aspects of sustainability when selecting the financial instruments to include in its portfolio. For example, an eco-friendly fund may choose to select financial assets that aim to generate a positive environmental or climate impact. Another fund might decide to select, within each sector, the securities of companies with the best overall sustainability profiles, such as shares or bonds with a high ESG rating. Others may focus on a specific environmental goal, such as the protection of biodiversity or oceans.

In general, strategies for sustainable investing vary, are not necessarily mutually exclusive, and can be combined and tailored to specific objectives. We can identify as many as seven of these strategies:

• negative/exclusionary screening: the exclusion from a portfolio of companies or sectors based on activities considered non investable on the basis of specific criteria referring to product categories (weapons, tobacco) or company practices (animal testing);
• norm-based screening: screening of investments against minimum standards of business or issuer practice based on international norms such as those issued by the UN, ILO, OECD and other UN Specialized Agencies;
• ESG integration: the systematic and explicit inclusion by investment managers of environmental, social and governance factors into financial analysis: the integration process focuses on the potential impact of ESG factors on firms' returns and risks and this, in turn, influences their investment decisions;
• best-in-class/positive screening: investment in sectors, companies or projects selected for positive ESG performance relative to industry peers, and that achieve a rating above a defined threshold;
• impact investing: investing in companies, organizations and funds that aim to achieve positive, social and environmental impacts in addition to financial returns: these are usually very specific investments such as those in micro-finance or in social or green bonds;
• Sustainability themed/thematic investing: investing in themes or assets specifically contributing to sustainable solutions - environmental and social - (e.g., renewable energy, energy efficiency, health);
• Corporate engagement & shareholder action: employing shareholder power to influence corporate behaviour, including through direct corporate engagement and proxy voting that is guided by comprehensive ESG guidelines.