What is ESG Investing?

May 1, 2014 |
2 minute read
|

Generally speaking, Environmental Social and Governance, or ESG for short, is used to describe a group of characteristics that can have a material impact on the long-term success of a company and, potentially, its long-term investment returns. Some examples of “environmental” criteria include factors such as energy consumption and greenhouse gas emissions. Examples of “social” criteria include supply-chain risk management, corporate citizenship, gender and racial diversity, and labor relations. Lastly, examples of “governance” factors include independent board leadership and CEO compensation. Investment managers that use an ESG approach consider these criteria and factors as part of their research and investment process.

Does ESG Work?

Using ESG factors in the investment process is still a relatively new phenomenon. However, hard evidence as to whether ESG factors can make a positive impact on investments is emerging. Many studies overwhelmingly support the theory that integrating responsible investing practices into an investment decision-making process can have a positive impact on performance. Research suggests that companies with higher ESG ratings tend to outperform their peers and are much more resilient to market downturns.

Commonfund’s Perspective on ESG

We believe that ESG should be one of the many factors weighed when it comes to making investment decisions. Understanding that ESG factors may have a material impact on performance, we analyze these factors as part of our fundamental investment analysis process.

By becoming a signatory to the Principles for Responsible Investment (PRI), Commonfund joined a professional network of more than 1,200 global investors and asset managers who work to put the six principles into practice. These six principles are:

  • Incorporate ESG issues into investment analysis and decision-making processes.
  • Be active owners and incorporate ESG issues into ownership policies and practices.
  • Seek appropriate disclosure on ESG issues by the entities in which we invest.
  • Promote acceptance and implementation of the Principles within the investment industry.
  • Work together to enhance our effectiveness in implementing the Principles.
  • Report on our activities and progress towards implementing the Principles.

The six principles were devised by the investment community to reflect the view that ESG factors can affect the performance of investment portfolios and, subsequently, must be given appropriate consideration by investors. The principles provide investors with a flexible framework so that they can incorporate ESG factors into their decision-making and ownership practices.

How to Implement ESG?

There are two things institutions should consider when thinking about adding ESG into their investment portfolio. First, define what ESG means to your organization. Figuring this out may help you to determine which specific ESG criteria matter the most to your institution. Second, decide if your institution wants to go beyond ESG to a more targeted approach such as impact investing. Fundamentally, investors must decide if certain environmental, social, or governance issues are important enough to their stakeholders and beneficiaries to incorporate into the portfolio and the mission of the institution..

Learn more about ESG.

Commonfund

Author

Commonfund

Stay connected with the Insights Blog

Popular Blog Posts


Market Commentary | Insights Blog

Chart of the Month | The Surprising Relationship Between Money Supply and Inflation

The potential for rising inflation is becoming a top concern for many investors and consumers. Many believe that inflation is already here as evidenced by price increases in commodities, homes,...
Perspectives | Insights Blog

The Case for Using the Higher Education Price Index® (HEPI) to Define Inflation for Colleges

When calculating return targets for an endowment portfolio, a conventional piece of the equation is often the Consumer Price Index (CPI). CPI plus 5% is the common short-hand formula for institutions...
Investment Strategy | Insights Blog

What is an OCIO?

Outsourced investment management, once primarily a solution for small institutions with limited resources, is now used by a broad range of long-term investors. When properly implemented, outsourcing...

Disclaimer

Certain information contained herein has been obtained from or is based on third-party sources and, although believed to be reliable, has not been independently verified. Such information is as of the date indicated, if indicated, may not be complete, is subject to change and has not necessarily been updated. No representation or warranty, express or implied, is or will be given by The Common Fund for Nonprofit Organizations, any of its affiliates or any of its or their affiliates, trustees, directors, officers, employees or advisers (collectively referred to herein as “Commonfund”) or any other person as to the accuracy or completeness of the information in any third-party materials. Accordingly, Commonfund shall not be liable for any direct, indirect or consequential loss or damage suffered by any person as a result of relying on any statement in, or omission from, such third-party materials, and any such liability is expressly disclaimed.

All rights to the trademarks, copyrights, logos and other intellectual property listed herein belong to their respective owners and the use of such logos hereof does not imply an affiliation with, or endorsement by, the owners of such trademarks, copyrights, logos and other intellectual property.

To the extent views presented forecast market activity, they may be based on many factors in addition to those explicitly stated herein. Forecasts of experts inevitably differ. Views attributed to third-parties are presented to demonstrate the existence of points of view, not as a basis for recommendations or as investment advice. Market and investment views of third-parties presented herein do not necessarily reflect the views of Commonfund, any manager retained by Commonfund to manage any investments for Commonfund (each, a “Manager”) or any fund managed by any Commonfund entity (each, a “Fund”). Accordingly, the views presented herein may not be relied upon as an indication of trading intent on behalf of Commonfund, any Manager or any Fund.

Statements concerning Commonfund’s views of possible future outcomes in any investment asset class or market, or of possible future economic developments, are not intended, and should not be construed, as forecasts or predictions of the future investment performance of any Fund. Such statements are also not intended as recommendations by any Commonfund entity or any Commonfund employee to the recipient of the presentation. It is Commonfund’s policy that investment recommendations to its clients must be based on the investment objectives and risk tolerances of each individual client. All market outlook and similar statements are based upon information reasonably available as of the date of this presentation (unless an earlier date is stated with regard to particular information), and reasonably believed to be accurate by Commonfund. Commonfund disclaims any responsibility to provide the recipient of this presentation with updated or corrected information or statements. Past performance is not indicative of future results. For more information please refer to Important Disclosures.