An ESG investment product should contain only those securities with a high sustainability score and would exclude companies with, for example, poor records on pollution, labor relations or management practices. It would also exclude the sovereign bonds of governments with similar poor records.
Research has shown that the use of ESG in security selection leads to better-informed investment decisions, and that sustainability strategies can perform better than non-sustainable ones, partly because of better risk management over contentious issues. Companies with a lower carbon footprint, for example, would face lower regulatory or societal risk than a polluter, and so its shares should be less volatile over time. Also read: The link between ESG and performance.
ESG strategies are growing in popularity among investors who want to be seen to be making a contribution to cutting global warming and adding to human development, without compromising on financial returns.
Also read: The pros and cons of ESG ratings for investment strategies