Inclusion Based Investing
Inclusion has become a buzzword in Environmental, Social and Governance (ESG) investing.
Funds invested under the inclusion based approach, also known as positive screening, grew 125% to $1.8 trillion globally between 2016 and 2018, according to the latest Global Sustainable Investment Review. This was much faster growth compared to the traditional exclusion approach to ESG, which screens out companies in negative scoring sectors such as gambling and pornography.
In contrast, inclusion strategies only fund companies that exceed certain ESG criteria. This could be across general targets such as the United Nations’ Sustainable Development Goals (SDGs), or in specific areas such as climate change or human rights.
One factor driving inclusion’s popularity is increasing interest among financial advisers and their clients in different approaches to ESG investing.
Why use inclusion?
The inclusion approach may suit investors who only want to fund companies that make a positive impact on ESG factors.
Also, some negative screening approaches exclude whole sectors, such as weapons manufacturing or oil extraction. But inclusion can take a more precise view of each company’s actual ESG impact.
For example, many oil companies have a strong commitment to developing green energy, so we believe they should not automatically be excluded from portfolios. EBI’s Earth portfolios include two oil companies for that reason.
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Positive screening reduces the number of stocks in a portfolio to those with a positive ESG score.
This makes it more concentrated and less diversified compared to integrated ESG approaches and to exclusion, which can include neutral scoring companies. The inclusion approach is more diversified than impact investing, which is highly concentrated.
Greater concentration can lead to more volatility and risk, relative to benchmarks, but could also have more meaningful impact.
EBI’s Earth Portfolios integrate ESG concerns into an existing overall strategy for growth and diversification.
EBI’s Earth Portfolios protect investors by incorporating ESG concerns into an existing strategy for preserving wealth and capturing growth.
ESG investing must be done with caution. Investors who focus on social goals at the expense of prudent investments will likely achieve neither.