ESG, SRI, and Impact Investing: A Primer for Decision-Making

Abstract

Investors throughout the world are increasingly interested in environmental, social, and governance (ESG) issues. However, they may be puzzled by the growing assortment of acronyms and terminology on the subject, leading to challenges in determining what—if any—action they should take. ESG investing is an investment-related activity that accounts for some type of ESG consideration. It is not a separate asset class, a single strategy, or even a single type of action, and importantly, the appropriate approach is not the same for all investors. The authors believe that specific forms of ESG investing can be prudent for investors with particular preferences, beliefs, resources, and circumstances. As with any other form of investing, investors must establish their goals and weigh the potential benefits of the various approaches against any relevant risks and costs to give themselves the best chance of achieving their desired outcome. In this article, the authors clarify the terms and trends and provide investors with an objective, practical framework for making informed decisions. Their four-step process helps investors establish specific goals, evaluate potential options, and decide on an ESG investing approach based on personalized criteria and trade-off considerations. TOPICS:Style investing, portfolio theory, portfolio construction, ESG investing Key Findings • ESG investing is not a separate asset class, a single strategy, or even a single type of activity. • Whether and how to address an ESG-related issue in a portfolio should be considered carefully, because the appropriate choice is not the same for all investors. • A practical four-step process can help investors decide what, if any, action to take is prudent.