One of the most remarkable trends within asset management over the last few years has been the growth in Sustainable Investing. The United Nations Principles for Responsible Investment now has over 2,500 signatories, who represent more than USD 80 trillion in assets.

This has led to a growing number of investors, particularly institutional investors, wanting to integrate sustainability within their investment processes. In this paper we explain our approach towards ESG integration, focusing on:

  • The ÃÛ¶¹ÊÓƵ taxonomy of sustainable investing, and how we use it to define our approach to ESG integration across our investment strategies;
  • The way we identify ESG risks in our research process;
  • ESG integration in practice. Using examples taken from existing strategies we illustrate the integration of ESG risks, how it helps mitigate existing risks and how it can improve the ability to generate long-term returns.

What is sustainable?

First we need to understand exactly what we mean by Sustainable investing as it is a broad concept. Our definition is based on three different approaches:

ESG integration strategies

Sustainability is included in the research process in order to enhance risk and return.

Sustainability focus strategies

The portfolio construction process leads to a better sustainability profile than the benchmark.

Impact investment strategies

Those with an explicit goal to have a positive environmental and social impact while generating competitive financial returns.

Key steps to integration

Having defined what we mean by sustainable investing we can then think about the process of ESG integration. There are three key points to keep in mind:

First

ESG integration entails an expansion of the scope of information used in the research process to include environmental, social and governance factors, rather than a limitation of the investment universe.

Second

ESG integration does not involve a formal change in the investment guidelines or prospectus, but enhances the underlying research process to better account for material sustainability risks that can negatively impact financial performance.

Third

Most fundamentally, integration is not driven by a normative or ethical perspective; it is focused on the potential material and financial impact of sustainability.

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