ESG Integration

ESG integration looks set to become the dominant global strategy in ethical investing.

The integration approach involves including Environmental, Social, and Governance (ESG) concerns into a predefined investment strategy, such as an evidence based portfolio.

$17 trillion is already invested in integration strategies and this is growing fast. But according to the United Nations Principles for Responsible Investment (PRI) many people think ESG integration means sacrificing performance, because they believe it is the same as negative screening.

Firstly, negative screening – which means excluding stocks based on ESG criteria – does not result in lower returns. Studies about ESG investments generally show they outperform non-ESG investments. Also, ESG integration means something very different from negative screening. For many fund and portfolio managers, integration is about using a proven fundamental strategy for growth, while also considering ESG issues.

This could involve some exclusion of stocks, but it could involve any other type of ESG approach, such as inclusion or impact investing. ESG integration does not act against an evidence driven approach, but complements and adds to it.

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Pros and cons

ESG integration is a broad and flexible approach because it can accommodate any viewpoint, strategy or criteria investors wish to use.

Fund and portfolio providers may, for example, take the Sustainability Accounting Standards Board’s materiality map or the United Nations’ Sustainable Development Goals as starting points for their integration strategy.

Advisers simply need to choose which way works best for them and their clients, just as they would with any investment style.

But it does mean integration approaches may require more explanation and education, compared to other ESG strategies.


EBI’s approach

EBI’s Earth Portfolios use ESG integration by selecting funds with positive ESG scores from Morningstar, which has the deepest and largest research in this area.

But the funds are only selected for investment if they meet all other evidence based principles, which aim to protect investors’ wealth and diversification. This makes integration the most diversified ESG approach – protecting risk and return profiles.